INSIGHT: Act fast, maybe cut back hard, but support the core

LONDON (ICIS)–Decisiveness in the face of short term challenges but a clear sense of purpose and strategic intent separate the high performing chemical companies from the rest,

Accenture research into the best performing companies in the sector over the past nine years underscores the importance of these two factors to continued success.

But now, facing a largely continuing turn down since the second half of last year, what additional approaches are needed to secure stronger profitability?

In the teeth of the great financial crisis the best performing companies cut hard and fast.

Accenture mentions BASF, which closed 80 plants and cut production at 100. At the time (2008/09) other companies slashed selling, general and administrative (SG&A) costs and took other, decisive action.

They needed to, of course, because there was so much pressure on them from significantly reduced demand (manufacturing industry plant closures) and a radically altered oil-based cost environment.

The best performing companies, however, kept pumping money into longer term strategic capital spending and research and development investment. BASF bought Ciba and, in 2009, lifted R&D spending above the amount spent in 2008.

The net cash used for investment at Eastman remained flat in 2009 compared with 2008. Kraton squeezed SG&A spending in 2009 by around 20% but almost doubled cash flows used in investment activities, the Accenture research points out.

“A further analysis of the figures confirms that on average over the past decade, high performers have continuously spent more on CAPEX and R&D than they depreciated (DA): ((CAPEX+R&D)/DA>1). This reflects their higher focus on innovation and/or growing their existing product portfolio and/or optimising the portfolio for future growth. They have taken this approach consistently throughout the economic recovery,” says Global Chemicals Research Lead for the consultants, Karin Walczyk.

Gaining long-term competitive advantage is one thing, keeping it is another.

The high performers kept performing and the gap between them and the rest widened until the start of the slowdown last year.

In the decade since the global financial crisis chemical companies have put more emphasis on operational excellence. For most of the time, with the growing economy, that helped lift all boats.

“A decade ago, it was operational excellence, resiliency and strategic acquisitions that were the key differentiators,” adds Walczyk. “All are definitely still valid today. What is new, however, are the new tools companies are leveraging to foster these differentiators.”

At its core, operational excellence is supported now by new technologies that themselves support better cost efficiency and cross-industry collaboration for innovation.

Chemical companies are benefiting from a more consumer-driven focus, better understanding of their customers and their customers customer. They need to understand how circularity impacts them, and the opportunities it presents alongside the threats to continuous output growth. Strategic acquisitions are as important as they were a decade ago but so much differentiation now is driven by new technology, or digital understanding and performance.

“By capitalising on technology innovations and the new opportunities presented by new markets, we can now see high performers and rising stars are excelling,” Walczyk says.

“New technologies are the key levers, helping companies to be faster than their peers, perform better, or simply tap into new opportunities for growth.”

Under pressure from a new downturn companies do well to apply the lessons of 2009. Be prepared to cut fast and hard if the need arises. But don’t cut away the core which, in this business, is focused on capital asset and R&D excellence.

Be ready for the future, however, and the new wave of advanced digital technologies.

Insight article by Nigel Davis