IHS Chemical Week


A view on strategic realignment in the global chemical industry


The global chemical industry is undergoing dynamic changes with external factors presenting vastly divergent challenges in different regions of the world. As such, the executives of global chemical companies face significant challenges.
Fundamentally, the industry remains driven by two main factors:
  • Global GDP dependence necessitates distinctive behaviors in emerging markets which continue to expand (albeit at volatile rates); Europe, where structural issues point to long-term stagnation; and the US, where a sustained economic recovery is taking hold.
  • Global issues including population growth and middle class expansion; food and water shortage; energy and climate change—all driving demand for chemical products under the mantra of making life better and our planet healthier—continue steering the march into downstream products.
Overlay the shale gas dynamics in the United States, which are moving the supply base of the industry west, while the demand side of the industry continues to move east and south, and executives have another significant issue to grapple with as they set their global business strategies.
It’s time for the global chemical industry to re-focus on strategic re-alignment, and recapture the dynamism displayed by the industry in 2009-2010 during the worst economic conditions in generations. There are huge rewards for the companies that develop their businesses in advance of the coming trends of today’s rapidly changing landscape. The following are five strategic platforms for development:
1.    Capture growth from emerging markets—increase the pace of developing emerging market footprints to capture long-term growth and the emerging customer base. Look beyond China. A portfolio approach to capture benefits and offset risks inherent in different markets comes from balancing geographic expansion.
2.    Optimize the portfolio—become more disciplined in identifying business units and segments that don’t align with broader business strategies and offer no long-term competitiveness. Remove sentiment attached to legacy businesses, which often results in clinging to sub-optimal areas.
3.    Build financial strength—many of the good things the industry was doing in 2008 onwards have stopped. Supply chains have become bloated, buffers have been built in inventory, and discipline around receivables collection has weakened. Moving third and fourth quartile working capital performance back to median performance, among the world’s 50 largest chemical companies, could unlock $24.9 billion in cash.
4.    Reduce business model complexity—build leaner, more efficient business models that can adapt quickly to change and steer away from the layers of structure and process that confuse the picture of underlying business performance and decision-making.
5.    Focus innovation to drive price and margin—the chemical industry is a leader in customer-centric innovation and new product development. Established market companies must remain focused on this for continued long-term success. Emerging market companies can place added emphasis on this core competency to position themselves closer to the heralded move downstream.
These strategic platforms are based on existing core competencies, but provide the necessary renewed focus and increased pace of change for the chemical industry. A successful strategy in today’s environment requires all of these platforms be performed simultaneously and equally well, albeit at different paces in different regions of the world.
The time for change is now and those companies that wait will fall behind those who embrace the dynamics of the changing landscape of the global chemical industry.

Mike Shannon is the global leader of chemicals and performance technologies and Paul Harnick is the global COO of chemicals and performance technologies for KPMG.

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