Closeness is key to competitive advantage

Author: ICIS Editorial

2021/04/09

As the COVID-19 pandemic enters its second year and its upheaval of global economies continues, chemical companies must address five focus areas to enhance or maintain their competitiveness - trade constraints, green chemicals, service-based offerings, agile sales and digital customer experience will be critical for future competitiveness. What makes 2021 different is the urgency to turn these buzzwords into real actions that will have a significant positive impact on revenue and margins.

The common denominator is “closeness”. Chemical companies need to get closer to customers to understand how their demand has changed, and then implement pricing models that closely reflect the true value generated. They also need to become closer to achieving real-time responsiveness, and consider moving production closer to home as costs, geopolitics and environmental standards make some forms of overseas production less attractive.

The ultimate driver behind this need for closeness is demand. In the chemical industry, demand is no longer predictable. The health crisis has led to sudden, massive shifts and extreme situations like excess capacity and growing inventories, or supply shortages and supply chain disruptions. At the same time, volatility in major commodity prices, combined with currency fluctuations and the imposition of tariffs, is keeping uncertainty high and putting margins at risk.

One challenge companies cannot overlook is that speed itself is a competitive advantage. This ranges from flexing production to being laser-focused on sales opportunities due to the dynamics in sub-segments. Some companies have already set new benchmarks for closeness in areas such as digital services and real-time customer engagement. Pressure for real action on sustainability is also increasing, as public and political support grows for significant moves away from fossil-fuel-based production. We offer the following guidance for chemical companies to master the five focus areas:

1. Work around trade constraints

Petrochemicals has always depended on a certain level of stability in geopolitics but the trade “equation” has become more complicated with the growing importance of sustainability. Today, decisions on where to sell and source depend not only on the political climate and costs, but also on compliance with environmental standards and customer demands. This will lead to a trend toward localisation as companies look to minimise the risks of trade disruption.

The pandemic set off chains of events that amplified disruptions. Lockdowns led to significantly less travel, which suppressed demand for fuels like gasoline and kerosene. Oil companies announced extensive plans to close refineries to rebalance supply and demand for fuels, where by-products such as naphtha are important chemical feedstocks. Such changes may force chemical companies either to import inputs in an uncertain environment or play more locally, potentially at higher costs. Localisation will take several years to plan and execute, but the second focus area will probably accelerate the process.

2. Find the best shade of ‘green’

Sustainability has moved from zeitgeist to a critical question for chemical companies. From carbon legislation to end-consumer expectations, pressure is growing for companies to deliver on the promise of sustainable materials produced with green energy. This will compel some companies to rethink their products from the ground up.

In the naphtha example, the problem might not be whether a chemical company needs naphtha right now, but rather whether it needs naphtha at all. If companies face competitive disadvantages from risk of supply shortages or trade constraints anyway, they should consider reducing dependency on fossil-based virgin inputs through recyclables or even non-fossil production routes with renewable feedstocks. However, sustainability is not a perfect choice.

The realistic challenge is not to “go green”, but instead find the best shade of green for the company and its customers. A close understanding of customer needs, expectations, and willingness to pay will be essential to assess the risks of investing in alternative asset structures and production processes. At the same time, regulatory requirements for component substitution in formulations may slow down adoption, requiring companies to build different scenarios for their value chains.

3. Focus on service-based offerings

In a recent Simon-Kucher study on service-based offerings, chemical companies showed the lowest share of revenues coming from services, at a mere 3%. The good news is the industry expects the share to triple in the next three years.

But, companies will fall short of becoming solution and service providers until they develop a service strategy and stop treating services as add-ons or extras. We suggest improving and expanding the transactional service offering in aspects such as logistics, training and data delivery, before progressing to more advanced service solutions. In many cases, this will be a question of skills and mindset.

Opportunities open up when chemical companies move away from a predominantly plant-and-production mindset and bring their business closer to the real-time dynamics of customer demand. That means shifting from “how much volume do they want?” to “what is the best way for us to help them?” You can’t sell services by the pound and volume-based price models do not align with value. Cost-plus models are also not applicable, because the marginal cost of some very high-value services is negligible. Rather, selling services requires a revenue model that aligns closely with the perceived value the services provide the customer.

4. Enable sales after COVID-19

Chemical companies have significant opportunities to make their sales process more agile, bringing closer to real-time interaction with their customers. Digitalisation is the enabler, and managing demand more efficiently is the motivation. Two areas are key for improvement.

First, companies can shorten their sales cycle. Testing and sampling activities account for up to 70% of the total time from initial customer request to closing. Clear prioritisation rules are a quick win to reduce time-to-market for the most promising opportunities, while virtual assistants like BASF’s myPharma or Evonik’s COATINO show the future “art of the possible.”

Second, low transparency in the sales funnel hinders early detection of buying patterns. To address this problem, 78% of chemical companies surveyed say they have initiated actions to secure and grow volume, such as identifying “winners and losers.” One minerals producer established a bi-weekly routine with its 10 most attractive customers per region to check for sudden demand changes and promptly adapt planning.

The days of locking in a demand forecast are gone. This is where digitalisation plays its role as a marketing weapon - not just an optimisation tool for operations. Digital technologies are an asset for sales - and not a way to replace or reduce responsibility - when used for visibility, guidance, and communication.

5. Enhance the digital experience

The “digital gap” between chemical companies and customers is growing. B2B buyers have become digital, while suppliers lag behind. Over 50% of B2B buyers are millennials and over 60% decide on purchases online before making contact with suppliers. These customers self-serve to obtain status on orders and do their own research thanks to greater accessibility of product data sheets and analysis tools. To build a future-proof go-to-market model, chemical companies need to redesign customer interaction, transform the channel mix, optimise the service model and align the sales operating model. In terms of channel mix, digital marketplaces provide a unique opportunity to get closer to customers in a cost-effective manner.

Marketplaces like CheMondis in Europe, Alibaba in Asia, and Knowde in the US help to reduce transaction costs across customer segments. The increased visibility and reach help companies capture new growth opportunities, but the challenges lie in maintaining control over the customer interface and staying close to customers.

By now, it is clear that “digital” is indispensable in chemicals sales and distribution. There has been too much talk with too little impact from past digitalisation efforts. The crisis has made this crystal clear to many industry executives, and 2021 is an opportunity to close the digital gaps and get closer to customers. ■

Jan Haemer is a Partner in Simon-Kucher’s global chemicals practice in Frankfurt, Germany. His focus is product portfolio management, marketing and pricing strategy, as well as price management frameworks and their implementation.

Dr Andrea Maessen is a Senior Partner in Simon-Kucher’s global chemicals practice and is based in Cologne, Germany. She specialises in the development of pricing strategies, the optimisation of pricing processes and price systems, and the improvement of sales efficiency and effectiveness.