Innovations, Volatility, New Business Models: Commercial Challenges in the Chemical Industry for 2020

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New technologies and new business models will become ripe for scaling, while the industry still faces traditional challenges such as volatility. Senior Partner Dr. Andrea Maessen and Partner Jan Haemer from Simon-Kucher & Partners offer guidance on how chemical companies can face these challenges.

Cologne – The chemical industry will be facing global macroeconomic trends and events – such as trade wars, political disputes, and recession risk – throughout 2020. The Chemical Industry Practice at Simon-Kucher & Partners has identified five additional challenges specific to the industry that manufacturers must address.

1. New technologies: In 2020, some technological improvements may finally scale to commercial levels.

Maessen explains: “The R&D and technology might be ready, but manufacturers need to make sure that their commercial processes and teams capture the full value of these opportunities. Examples include emerging recycling solutions for a circular economy, and the improvements in batteries for electric cars.”

Jan Haemer adds: “Some companies have exciting innovations that will help fundamentally transform industries. Monetizing innovations and value pricing is nothing new to the industry, however, the existing opportunities are huge. Getting the pricing and sales right will make a significant difference.”

2. Rapid customization: Here, strong technological advances have been achieved. Manufacturers can use supercomputers to analyze material properties and predict their interactions in a formulation in a fraction of time that is needed for physical testing of samples and products. Companies can develop better solutions, faster and more efficiently.

This creates two opportunities according to Maessen: “The first is efficiency. If you have many ongoing efforts in your research pipeline, you can now test thousands of potential customer solutions quickly. The second opportunity is to optimize your resources in Marketing & Sales in order to effectively commercialize the outcome.”

Haemer adds: “Money is an objective way to decide what solutions to pursue or prioritize. The ability to recognize and quantify the value of these solutions becomes a critical success factor. This requires a much stronger cooperation and integration of sales and R&D processes than in the past.”  

3. Planning amidst volatility: The vast majority of the chemical industry’s revenue and profit comes from standardized products. The more established the product, the more the product will be subject to volatile demand, due to swings caused by stocking and de-stocking.

Dr. Andrea Maessen clarifies: “Changing availability of capacity, the uncertainty surrounding trade wars, and the pursuit of lean supply chains exacerbate the situation and make pricing a challenge in these markets. Companies need better demand and price planning in order to manage volatility in a more disciplined and forward-looking way. This is another area where science and technology are now much more advanced and can replace “gut-feeling” decisions. Advanced analytics and machine learning can now mitigate the risk of becoming too aggressive in price and volume decisions.”

Haemer states: “The implementation challenge lies in offering the sales team better visibility and guidance for pricing and selling. These technologies are an asset for sales, not a way to replace them or reduce their responsibility.”

4. Digital marketplaces: Digital marketplaces offer one-stop-shopping, like Alibaba in China or CheMondis in Europe, but they can be a double-edged sword for chemical companies. “Because of this offering, the growth argument is strong. Additionally, they lower cost-to-serve for standardized products by radically cutting transaction costs. But if the manufacturers don’t get their go-to-market strategy clear, define their product portfolio strategies, or calibrate their prices in a way that properly balances volume and margin, they risk amplifying the effects of commoditization.” says Haemer.

A great opportunity, according to Andrea Maessen: “Getting prepared for this additional channel to market will allow chemical companies to orchestrate and shape their commercial offering for their customers in a more differentiated way and ensure a more robust and effective set-up.”

5. “Chemicals as a Service”: Sensors and the Internet of Things (IoT) generate data that improves the customer’s and the manufacturer’s visibility in terms of process management, systems applications, and usage. Instead of selling products priced by volume, Ecolab, for example, says it will manage their customers’ waste water. Meanwhile, coating manufacturers promise to manage customers’ surfaces.

Maessen explains: “The traditional business models of chemical companies are not well designed to sell these smart solutions. They need fundamentally new ones, especially a new way to manage customer data (because determining value requires greater data-sharing and integration), a new value metric and revenue model (to include decisions on offer design, price dimensions, and models as well as price levels), and a new way of selling (where salespeople will need to learn how to sell value in terms of factors such as savings and efficiencies). The chemical industry can learn a lot from the software industry here, where marginal costs of serving customers are close to zero. Their business and revenue models are strictly focused on customer benefit. They are most advanced in subscription pricing.”

Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with more than 1,400 professionals in 39 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has more than 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.