Chapter 1
Lever 1: Innovation
Innovation needs to be embedded in every company’s corporate DNA to drive organic revenue growth, but no company can do it alone.
Innovation in the chemical industry should not be limited to developing new products. Chemical players need to leverage the entire chemical ecosystem to develop new business models and discovery methods, explore new markets, and increase innovation efficiency. Companies can innovate in products and new discovery methods, as well as in several additional areas.
While companies are increasingly turning to data-driven innovation, they also need to focus on new applications and processes to sustain a robust innovation pipeline. For instance, innovation across categories can encompass:
- Applications: new products with broader use cases, such as repairing human tissue, energy storage, aerospace, future of mobility
- Business models: closer collaboration with customers, cross-selling and channel consolidation; multiple players joining platform business
- Products and discovery methods: recyclability, new chemistry including green, quantum chemistry, multi-scale nano-materials, material for 4D printing, AI/ML in materials design and discovery
- Processes: process simulation; 3D printing; lower-carbon-footprint processes; conversion of CO2, coal and waste into chemicals; and use of bio-based raw materials
Companies should also consider their investment allocation. They cannot afford to miss current trends, but at the same time they need to prepare for upcoming megatrends to innovate faster than competitors. Internally, management should promote a culture and environment of open innovation through a model of test fast, fail fast, reiterate.
Externally, they need to be agile to co-create with various members of the ecosystem, from suppliers and technology partners to customer organizations and consumers. They also should seek to crowdfund new ideas and work with idea providers from concept to product-scale stage.
It’s time to understand that customer demand is not just actual or forecasted orders, but includes their buyers’ values matched with innovative, differentiated solutions. Orders then follow.
Here’s what you should be thinking about.
Now
- Plan for multi-pronged innovation: products, process, operating model, applications
- Increase R&D spending in growth areas (e.g., electrical/autonomous vehicles, nutrition, 5G, microbiome health, 3D printing, renewable energy)
- Develop chemicals and processes that have minimal ecological impact
Next (one to three years)
- Embed an innovation strategy into corporate strategy
- Design operations to manage needs of new business models
- Ensure that new products and processes are aligned with UN Sustainable Development Goals
Beyond
- Exploit data to generate new revenue streams
- Offer a combination of products and services to support recycling and the circular economy throughout the value chain
- Leverage cognitive search and analytics to amplify R&D expertise
Looking ahead
70%of respondents said they are significantly investing in innovation beyond traditional product R&D, according to the EY Industrial Products Innovation Survey 2018.
Chapter 2
Lever 2: Pricing strategy
Unrealized price potential is one of the biggest lost opportunities as chemical companies try to maximize top- and bottom-line growth.
Marketing and sales excellence is a key driver for organic growth, and it has often been a hot topic for chemical companies. Within a company, the development of the sales organization is significantly connected to long-term success, including profitability and market share growth.
Successful chemical companies are much better positioned with respect to the levers in the EY sales and marketing excellence model, shown below, due to their clear alignment of the sales and marketing functions. Ideas for improvement can be found in all sales functions, but implementation of those remains a challenge. A systematic review of key marketing and sales success levers is needed to navigate a digitizing environment.
The EY model provides sales excellence guidance and addresses eight fundamental elements of sales, divided into strategic or operational elements and company- or employee-driven elements. In applying this model as an analytical and optimization tool to various chemical industry segments, successful organizations were found to be significantly stronger in all eight sales elements.
Out of this framework, strategy and voice of customer heavily influence pricing strategy, which is key to achieving sustainable organic growth by capturing maximum value from each customer.
A review of the top 20 chemical players1 that stated the impact of price on revenues in their business presentations found they were able to pass on to the customer only about one-quarter of any cost of goods increase. Numerous challenges drive this phenomenon, including increasing competition among chemical players, a volatile oil price environment, increasing environmental regulations and the continued commoditization of core products.
In addition, differentiated supply chain models for distinguished product groups are a baseline for proper allocation of production and fulfilment cost. This provides another pricing advantage in a commodity and specialty environment, since it provides real cost per product group and not just averages.
Chemical companies have rarely considered pricing as a top management priority, which explains why the industry has lagged in managing price effectively. In this era of digital transformation, where the customer has increasing access to pricing information and competitors are rapidly advancing their digital capabilities, companies that are slow to act may find it difficult to maintain margins as raw material and freight costs fluctuate.
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In addition, differentiated supply chain models for distinguished product groups are a baseline for proper allocation of production and fulfilment cost. This provides another pricing advantage in a commodity and specialty environment, since it provides real cost per product group and not just averages.
Chemical companies have rarely considered pricing as a top management priority, which explains why the industry has lagged in managing price effectively. In this era of digital transformation, where the customer has increasing access to pricing information and competitors are rapidly advancing their digital capabilities, companies that are slow to act may find it difficult to maintain margins as raw material and freight costs fluctuate.
It’s only when you truly understand the needs of your customer’s customer that you are able to provide differentiated solutions that stand out from the rest.
However, increasing prices is not always an option, productivity gains can provide a better price position especially for commodity chemicals. Nevertheless, companies that focus on the key pricing strategy levers can outgrow the competition in terms of organic revenue while maintaining a strong bottom line.
Now
- Manage raw material cost fluctuations by using index- or market-based price agreements
- Improve effectiveness of price increases by regularly monitoring price realizations
- Clearly define roles and ownership for the pricing process, including pricing control and transaction profitability
Next (one to three years)
- Adopt dynamic pricing to enhance value-based pricing capabilities
- Align pricing with value for different customer segments based on value perception
Beyond
- Embrace a digital pricing model to align prices to innovation or value delivered by products and services to monetize innovation
- Apply analytics to understand the price variance for various customers and visibility into transaction profitability
- Drive culture change so that all company employees perceive pricing as a priority issue and a major contributor to revenue growth
Chapter 3
Lever 3: Customer-centricity
Technology advances must be embedded into the whole customer experience for chemical companies to evolve in today’s changing consumer world.
As technology advancements enable a better customer experience, the customer needs of end-use industries increase. These dynamics, coupled with intensifying competition, causes business-to-business (B2B) customers to require much more than simply a low-cost product.
They value everything from the speed of delivery, high customization, multichannel buying portals to technologically advanced and environmentally friendly products. Emerging technologies such as artificial intelligence, the Internet of Things, and augmented and virtual reality are beginning to enable solutions to increasing customer expectations.
“Chemical players need to place the customer at the beginning of their value chains — not the end — by aligning customer strategies and priority areas with their own,” said Frank Jenner, EY Global Chemical Industry Leader. “It’s only when you truly understand the needs of your customer’s customer that you are able to provide differentiated solutions that stand out from the rest.”
Satisfying these customers is a business imperative. The EY Commercial Transformation 2019 Survey indicates that 64% of leading manufacturing companies (those with revenue growth between 5% and 15%) are customer-centric.
B2B e-commerce platforms are setting standards of efficiency and speed in delivery, further increasing customer expectations. Lastly, increased demand for green products and the implementation of sustainability-oriented regulations by governments are pushing chemical players to intensify their development of sustainable products and processes.
Developing and implementing a customer-centric strategy requires revisiting the company’s strategy and moving ahead with the customer at the core. This strategy and set of values need to be reflected in the company’s policies and culture. Chemical players need to integrate their external focus areas such as marketing and sales, product enhancement and customer experience with their internal strategy, policies, communication and culture.
There’s also a need for chemical companies to move closer to the customer of their customer. Only then will they be in a position to promptly act or react to demand dynamics (tailored products, reduced time-to-market and cost savings). Such a transition will lead to a win for all participants, but moving out of a pure supplier role will not be easy for chemical companies.
While co-creating products has many upsides, end customers do not want to be locked in with a supplier and unable to switch in an environment of constant price increases and little innovation.
Moving in this direction could entail becoming part of the customer ecosystem, buying data to innovate and provide better service through enhanced AI or apps, or being a user but not necessarily an owner of a platform.
Additionally, digitization can provide key tools to enable customer engagement and add value to the customer experience beyond the product being offered. Like business-to-consumer players, chemical companies need to provide omnichannel sales networks by ramping up e-commerce, both direct and through third parties.
Further, chemical companies can enhance their offering by using machine learning for additional post-sale services, blockchain-protected processes for instilling trust, and data and analytics to help enhance post-sale product performance.
It’s clear that chemical companies need to incorporate their customers’ key focus areas within their medium- to long-term strategies. A consistent customer connection from as early as product development will lead to sales that can enable chemical players to keep pace with their customers’ evolving needs and demands.
“It’s time to understand that customer demand is not just actual or forecast orders,” said Jade Rodysill, EY Americas Advisory Chemicals Leader. “It’s the realization of their buyers’ values matched with innovative, differentiated solutions. Orders then follow.”
Here’s what you should also be thinking about.
Now
- Shift from selling products to innovative selling solutions
- Deliver customer experience through digitalization — CRM platforms, mobility apps, blockchain-enabled transactions, data science and predictive analytics
- Strengthen sales and marketing to realize better pricing, more channels and higher brand initiatives
Next (one to three years)
- Develop more personalized experience via “digital stores”
- Become an ecosystem company rather than a product company
- Offer data-enabled services to customers
Beyond
- Move to new fit-for-purpose organizational structure to increase customer focus
- Enable customers to deliver differentiating solutions and grow in their markets through innovation
Chapter 4
Toward a sustainable future
Chemical leaders must create businesses and cultures that can drive the duality of optimal performance today and innovation for the future.
The challenge for all chemical companies, regardless of size, is to consistently focus on commercial growth in all economic and industrial cycles — upward or downward. A steady focus on sustainable business growth will prove to be a firm’s competitive advantage and enable it to weather challenging times.
Chemical companies need to identify key industry or macro trends that will spur the next wave of growth. For example, meeting rising global demand for food and achieving food security is a UN Sustainable Development Goal. There is a need for strong collaboration and thus a significant opportunity for the energy, fertilizer and agricultural markets to help achieve these objectives.
As chemical companies embark on their transformation journey to accelerate revenue growth through the key growth levers, they should adopt an agile mindset. This can be more challenging than it sounds, because change involves taking people out of their comfort zones (and their current way of working) and pushing them to do things differently. The leadership role becomes most critical in driving that change throughout the organization.
There are various opportunities through which chemical companies can drive a shift in mindset from “traditional” to “agile”:
- From being a manufacturer of products to identifying as a provider of solutions and services that may require manufacturing
- From being broadly risk averse to adopting a risk profile that is fit-for-purpose — being thoughtful but agile
- From having a “do it in-house” mentality to collaborating with various ecosystem participants (e.g., suppliers, customers, universities)
- From defining customer needs by orders to defining their needs by their buyer values and their customers’ buyer values
- From focusing solely on attracting talent to focusing equally on attracting, retaining and developing talent
- From focusing on technology infrastructure too much and too soon in lieu of process and people to becoming business-led, process-driven and technology-enabled
- From having a short-term focus that self-justifies continuous improvement to having a longer-term focus enabling agile transformation
- From rewarding for responding to problems and issues to rewarding for a lack of “noise” — sensing and assessing over responding
- From running safe plays or replicating peer strategies to exploring innovative solutions built on tested, trusted methods and components
Building, accelerating and sustaining momentum across innovation, customer-centricity and pricing levers require companies to be self-critical and self-aware of the traits and tendencies typically displayed in the chemical industry. Such awareness will enable a new mindset that drives agility, individual and business performance and shareholder value.
Summary
Chemical companies need to focus on innovation, pricing strategy and customer centricity simultaneously. Each of these levers relies on strong capabilities in digital, talent and culture, and sustainability, so business leaders will need to think, operate, organize, hire and invest differently.
