THE EXECUTIVE ISSUE N°36 | Quarter 1, 2010
Chemical
Industry
Developing Your Managers to Deal with
the Changes in the Chemical Industry
Developing Your Managers to Get Things Done
Chemical Industry
Developing your People to deal with the
Changes in the Chemical Industry
I: The Chemical Industry’s 3 Main Business Models
The chemical industry is one of the largest and most diversified industries in the world. In Western Europe
alone it provides employment to about 1.26 million people. It consists of several small industries that cover
hundreds of segments. The industry applies three main business models to create value for its customers:
• Asset-driven players: They explore or buy oil/gas and refine
it into petrochemicals and other basic chemicals. Access to Based on an in-depth analysis of the
the raw materials is the critical success factor. market trends in the chemical industry by
• Integrated players: Besides refining oil and providing basic ATKEARNEY, Management Centre Europe
chemicals, they go one step further “downstream” in the has developed offers to enable your people
value chain into the production of polymers. Some of them to deal with the challenges facing your
might also have “specialty” divisions. industry. In these pages you will find a
• Specialties players: These players buy intermediate products summary of the ATKEARNEY report.
(i.e., basic chemicals or polymers) and process them into For a copy of the full report, visit: www.
specialty products related to specific functionalities. Some
mce-ama.com/ATKearney_Report.
of them are focused on a niche market. Others are more
broad-based.
Chemical sector players are adopting three value chain models
Value chain coverage of some selected players
Petrochemicals Basic Chemicals Polymers Specialties
Asset-driven
Integrated
Broad-based
Specialties
Focused
Integration / value chain coverage
Well-known players in the chemicals industry have different strategies for offering value. Some are involved only in finding and selling oil and natural
gas, while others create basic chemicals and polymers. Others focus on producing specialty chemicals.
2 The Executive Issue 36 | Quarter 1, 2010
Chemical Industry
II: What are the important macro-trends that impact the
chemical industry?
Natural Resources and the Regulation
Environment Regulation will continue to influence the development of the
The portion of the world’s population suffering from water chemical industry. Growing distrust of the private sector has
scarcity is increasing dramatically. The chemical industry is one empowered governments to make new regulations. One example
of the significant users of water. It will need to re-design its is Europe’s REACH (the Registration, Evaluation, Authorisation
processes to reduce their water usage. and Restriction of chemical substances) regulation.
Globalization Demographics
Cash rich government funds and companies from the ME and Population shifts will have major consequences. In developed
Asia are investing in Western companies to acquire knowledge countries, chemical industry workers are retiring, leaving
and brands. Result: The chemical industry is increasingly taking companies without experienced managers to take over
place globally. This means longer supply chains and more foreign leadership roles. Developing countries have a high percentage
competitors threatening local markets. of young people, but many of them need development to work
in the chemical industry.
Major Shifts in Consumption Patterns
Geographic Shift. Today about 70% of consumer spending is
concentrated in North America, Europe and Japan. But 10 years
from now, about 80% of the middle-income consumers will live
For more information on
outside of these economies.
Shift in End-User Choices. There is also a clear polarization of
these and other trends,
consumption in the chemical industry. For example, consumers turn to “Business Trends
can now choose between a basic, cheap wall paint or a premium Overview” on page 4.
one with special properties such as water resistance.
Macro-trends Affecting Global Economies
• High energy cost will compound the Middle East advantage
Natural Resource & Environment • Innovation will be driven to change industry economics
• Economic and political integration will continue requiring
Globalisation chemical sector globalisation to compete
• Emergence of mass markets in developing countries will drive
Consumption Patterns strong chemical sector growth and the need to reposition asset
and product portfolios
• Government regulation change will have localised impact
Regulation & Activism • Environmental activist pressure may increase regulation
• New technical resource pool will be biased to developing
Demographics countries, with talent deficit in developed regions
High Low
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Chemical Industry
III: How do these Macro-Trends Impact Your Business?
Future Planning: Key success factors that will drive restructuring and
enable players to integrate their value chain—or not!
Petrochemicals Basic Chemicals Polymers Specialties
1. Asset Driven Players 2. Specialties Players
• Achieve scale to compete in commodity sector • M&A restructuring synergistic Portfolio and establishing
• Asset restructuring for demand shift East and low cost Global leadership in Market segments – What focus?
feedstock • Divest / restructure operating model for commoditisation of
• Can specialty market segment ownership create advantage? market segments
• Western Oil & Gas players divest Petrochemicals or • What participation model for new technology / market
restructure poor assets segments?
3. Integrated Players/Polymers
• Achieve scale to compete in the commodity sector
• Asset restructuring for demand shift East and low cost feedstock
• Will an integrated portfolio be an advantage or a liability?
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.
4 The Executive Issue 36 | Quarter 1, 2010
Chemical Industry
1. For Asset-driven players: Managing the Impact on Your Business
The advantage of asset-ownership
In petro-chemicals, 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 also closer to Asia than Western producers of
chemicals are. Middle Eastern producers will increase their
capacity to produce petrochemicals and basic chemicals. Their
activities will also create local employment. These realities will
compound the weak asset position of 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, Western producers of petrochemical and
basic chemicals may need to seek mergers, joint ventures,
partnerships or alliances with ME companies. Joint Ventures, Partnerships, Alliances
For more information about the opportunities—
They may also have to consider “moving up the value chain” and potential pitfalls—of partnerships, please
into polymers and/or specialties. turn to “Finding the Right Partner for an Alliance
or Partnership” on page 88.
Implications for Asset-driven Players
Importance Impact of Future Change between
Key Success Factor
Today Trends Scenarios
Access to low-cost raw material ++ L
Low-cost manufacturing = L
Supply chain excellence ++ H
Industry supply/demand balance management + H
Ability to fund growth investments = M
Importance today: High Low
Impact of Future Trend: + increasing importance; - decreasing importance; = no change
Change between scenarios: High, Medium, Low, /=no change Source: A. T. Kearney analysis
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Chemical Industry
Critical success factors for Asset-driven
players
For asset-driven players, there are five critical success factors:
• Access to low-cost feedstock. This will become even more
important in all scenarios
• Low-cost manufacture. This is an entry ticket for competitive
ROIC in all future scenarios
• Globalization of supply chains capability. This will drive
advantage, particularly with more open trading between
regions
• Industry supply/demand balance. This becomes more
challenging to manage. It will be made worse by inter-region
trade restrictions
• Capital requirements to capture growth. You will need
access to funds and committed ownership to compete with
world-scale plants in ME and Asia
There are opportunities for asset-driven players, even those who
are in a weak asset position. Many of these opportunities may
come from mergers, acquisitions, partnerships and alliances.
Still other opportunities will probably be found in “moving up
the value chain” into polymers and/or specialties.
6 The Executive Issue 36 | Quarter 1, 2010
Chemical Industry
2. Integrated and Specialty players: Managing the Impact on Your Business
For integrated and specialty oriented players, critical success For example, BASF acquired Ciba, and Dow Chemical purchased
factors will be an increased importance of innovation, customer Rohm and Haas. These are examples of “basic” chemical
“intimacy” and complexity management. companies acquiring specialty players.
Here again, globalization of the supply chain capability will
drive business development. Growth in this domain will come
from organic growth and from 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 downstream business has access to
cheap raw materials. At the same time, they need to get the
most out of their activities upstream in the value chain. For
many companies, doing this has already resulted in acquisitions.
Building “Green” into the
Chemical Business
Global interest in reducing CO2 emissions and
in protecting the environment manifests itself
in business and consumer markets as wanting
to trade with “green” companies. To learn more
about this trend and the opportunities it presents,
please turn to “A ‘Green’, ‘Sustainable’ and
‘Ethical’ Business Model? ‘End-to-End’ Supply
Chain Innovation” on page 72.
Implications for Integrated and Specialty oriented Players
Importance Impact of Change between
Key Success Factor
Today Future Trends Scenarios
Customer Intimacy ++ /
Complexity Management ++ /
Innovation Capability ++ /
Supply Chain Excellence + L
Ability to fund growth investments + H
Importance today: High Low
Impact of Future Trend: + increasing importance; - decreasing importance; = no change
Change between scenarios: High, Medium, Low, /=no change Source: A. T. Kearney analysis
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Chemical Industry
Integrated Players: Working 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:
1. Basic chemicals
2. Polymers
3. Specialties
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.
Chemical Players with Consumer Products
Changes in consumer markets will affect parts
of the chemical industry—those with consumer
products. To find out the latest developments,
please turn to “Consumer Markets are Changing
Fast. Are Your People Ready?” on page 60.
8 The Executive Issue 36 | Quarter 1, 2010
Chemical Industry
Specialty Players: Going for Premium Offers and Custom-Made Solutions
Specialty players are operating in a very fragmented market.
They 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, innovation based on customer intimacy
is about working with their customers to jointly develop new
products or new applications. This requires teamwork. It also
requires a managerial approach that is different from Integrated
players.
Being successful in producing these 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 the developing 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?
A full report on this subject prepared by
ATKEARNEY, “Identifying a Perspective on
the Chemical Industry”, is available at:
www.mce-ama.com/ATKearney_report.
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