Market outlook: Performing at the highest level

14 June 2013 09:51  [Source: ICB]

What can companies do to improve margins once they have cut costs time and time again? A programme of performance improvement can bring top- and bottom-line growth, as AkzoNobel is finding out

With many chemical companies experiencing sluggish sales growth since 2008-2009, the pressure is on for management to drive top- and bottom-line improvements.


 Copyright: Rex Features

Cost cutting has been used extensively but cannot be maintained indefinitely, so there is growing interest in using other approaches, and ones that might actually deliver better returns.

One approach companies are turning to is value management, either on its own or as part of a wider commercial excellence programme. One such company is AkzoNobel, which has been affected in recent years by raw materials price pressures.

As part of its corporate performance improvement programme announced in September 2011, the paints, coatings and specialty chemicals company has been focusing on improvement across its sub-business units (SBUs), and originally set itself the goal of rolling out a programme in just three years.

During its recent strategy update this February, AkzoNobel announced that the company-wide performance improvement programme was being accelerated to deliver an overall earnings before interest, tax, depreciation and amortisation (EBITDA) improvement of €500m ($660m) by the end of 2013.

A small corporate team has been working with management consultancy Booz & Company to implement the initiative across the company, focusing on several core areas:

Customer needs-based segmentation;

  • Key account management;
  • Process and governance;
  • Pricing;
  • Product management; and
  • Channel and sales force management.
    The main focus, explains Marc Spekreijse, project director for AkzoNobel, is not on cost cutting, but on growing the top line by improving value; better aligning customer offerings to their needs; and making more efficient use of available resources.

    As he explains, "It's by focusing on our true customer needs that we are able to serve them better and make progress in the marketplace."

    Given the size of AkzoNobel (turnover was over €15bn last year) and the way it is organised into a large number of SBUs - some product-based or market-based, some geographic - the task of implementing the programme in the time frame posed a serious challenge, explains Spekreijse.

    The core central team supported by Booz had to sell the initiative to cross-functional teams in each of the SBUs, analyse the customer base and pricing, and use various tools and strategies for managing value and tailoring services to each customer. "Value improvement and capability development go hand in hand", says ­Spekreijse.

    Initially the programme was designed as a four-week initiative focusing on the foundational capabilities; later on it was extended to cover a wider scope.

    There were two key elements - the training and the practice - so that by the end of each project, the SBU could take ownership of the process and complete the programme fully itself. During the course of the programme, Booz supported AkzoNobel in achieving its own independence and as a consequence all the learning and expertise will be consolidated in-house.

    Richard Verity, vice president of energy and chemicals at Booz, points out that the process "is all about building capability and delivering value. We created an on line training module and some case examples in commercial excellence, and then set about delivering results".

    The first project was initiated in December 2011. A suite of criteria were used to select the first SBUs to undertake the programme, depending on willingness and the potential impact on the business. "We did not just choose the worst performers," points out Spekreijse, "but looked at some of the best, too, so we could learn as we went through the process with waves of SBUs."

    Each project kicked off with a two-day workshop with around 20 SBU participants and the core team, focusing partly on training and partly on action planning. After six weeks, a validation workshop was held, led by key SBU managers, taking a pragmatic, action-oriented approach to come up with deliverables.

    One key to success was getting SBU management teams to buy into the case for change, says Spekreijse. After each project, best practice was captured, shared and fed back into training.

    The process was implemented consistently, irrespective of the SBU involved. Spekreijse says: "It is the approach and skills that are important, not the type of business. As we work in close cooperation with the SBU, they bring in the specific business expertise and will learn about the process during the project. In the same way our project teams learn from the business."

    AkzoNobel and Booz decided to focus on a limited number of key areas within commercial excellence to make the performance leap. These were customer segmentation; pricing; reporting; and product management.

    It was decided to adopt a needs-based segmentation of customers - to ensure that each one is accorded just the right level of service depending on the sophistication of the products they buy and the associated service requirements. A structured segmentation was adopted for each SBU.

    By tailoring service offerings to suit customer needs, unneeded service costs can be cut, freeing up capacity to support and develop other services. "We needed to challenge habits", says Spekreijse, "and make a conscious decision on service levels."

    Verity adds that this element of needs-based segmentation was "one of the more transformative things we proposed. It is often hard to measure and has to be thought through to achieve best practice."

    A second key element of the approach was to look at pricing and whether to adopt either cost-based pricing or value-based pricing. The first has the benefit of creating visibility and transparency. You can, for example, get a better or earlier view of the impact of raw materials price shifts and their impact on product price levels. It is widely used, especially in the more commodity end of industry, says Verity.

    But in the longer term there is more benefit to be derived from value-based pricing, believes Spekreijse. The key point is to ensure the business is aware of what it offers the customer and the value it brings to them.

    It is closely aligned to the needs-based analysis and two things are required to make it work: comparisons and references with other products and producers in the market, and quantifying the gap between the reference and what you are offering. "The challenge is to change from words into numbers," says Verity.

    The third key element was reporting, which involved a close analysis of the sales data in graphical form. Reporting can create detailed, graphic insights into a company's economics and give managers at every level a crucial tool for decision-making.

    Too often, notes Spekreijse, companies are geared to financial reporting and do not gather and analyse the type of data that will help value improvement. "We added reports to the commercial side of the organisation and made them as simple as possible so sales and marketing people could look at them and ask meaningful questions."

    The last element is product management. "Here we looked at reducing complexity by eliminating less popular products, taking duplicates out that came for example from our history of acquisitions, and having a closer look at packaging formats where possible."

    AkzoNobel is now more than half-way through this initiative and has established a fully trained team of project leaders and analysts to execute it further. The challenge now is to transfer the accumulated process and knowledge to the SBUs that have not yet taken part and to review progress at those that have already been through the training.

    "We are now preparing for what happens at the end of the first quarter of 2014, when the global project team will be dissolved," says Spekreijse. The key to lasting success will be how well the learnings from the process will have been embedded in the day-to-day procedures of the SBUs' sales and marketing personnel.

    The proof that all this works, will of course, be evident in the bottom line - and, if experience is anything to go by, says Verity, "within a pretty short time".

    By: John Baker
    +44 20 8652 3214

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