McKinsey on Chemicals
Number 3,
Winter 2011
4
22
40
Chemicals’ changing competitive landscape
Innovation in chemicals: An interview with Dow Corning’s
Stephanie Burns and
Gregg Zank
Improving pricing and sales execution in chemicals
10
32
46
A capital-markets perspective on chemical-industry performance
Capturing the lean energy opportunity in chemical manufacturing Kick-starting organic growth McKinsey on Chemicals is written
Editorial Board: Florian Budde,
Copyright © 2011 McKinsey & Company.
by consultants in McKinsey’s global
Philip Eykerman, Bob Frei,
All rights reserved.
chemicals practice together
David Hunter, Tomas Koch, John Warner
This publication is not intended to be
with other McKinsey colleagues.
Editor: David Hunter
used as the basis for trading in the shares of any company or for undertaking
This publication offers readers insights into value-creating strategies
Art Direction: Veronica Belsuzarri,
any other complex or significant financial
and how to translate these
Shoili Kanungo
transaction without consulting
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McKinsey on Chemicals
Number 3, Winter 2011
4
10
22
Chemicals’ changing competitive landscape
A capital-markets perspective on chemical-industry performance
Innovation in chemicals: An interview with Dow Corning’s
Stephanie Burns and
Gregg Zank
High energy prices and the global economy’s eastward shift are creating new chemicalindustry leaders who play by different rules.
Newcomers must build capabilities to sustain their success, while incumbents must sharpen their value propositions.
Long-term analysis shows that capital markets base valuations of chemical companies above all on past operating performance, and that there is little difference over time between the specialty, commodity, and diversified segments.
Dow Corning’s CEO and
CTO talk about successful approaches to newproduct and businessmodel innovation.
32
40
46
Capturing the lean energy opportunity in chemical manufacturing Improving pricing and sales execution in chemicals
Kick-starting organic growth
Companies can adapt lean tools and approaches to improve energy efficiency and capture significant savings in the current environment of high energy prices. Some chemical companies have blind spots when it comes to steering sales— and they pay for it in lost margins and growth.
An approach built around a more granular level of insights makes it possible to improve execution and boost returns. Even in a recovering economy, many companies see only limited potential in organic growth. But by targeting micromarkets and reorganizing the sales force to prioritize growth, companies can achieve growth rates well above the overall market.
2
Introduction
Florian Budde,
Tomas Koch, and John Warner
changing competitive landscape” shows how high energy prices and the global economy’s eastward shift are aiding the rise of new chemical industry leaders, companies playing to different rules than the incumbents that have led the industry for the last several decades. While the incumbents have focused on classic shareholder value, the newcomers are more focused on resource monetization and economic development. If each type of company is to thrive, the newcomers need to build capabilities in management, innovation, and marketing performance to capture their full potential, and incumbents must adapt their strategies and
Welcome to the third issue of
priorities to this new landscape.
McKinsey on Chemicals
Our second article takes another longer-term
Over the past year, the worldwide chemical
perspective on the industry, in this case
industry has seen a rebound that has surpassed
that of the capital markets. Our analysis of the
its most optimistic expectations. Demand
period from 1994 to 2009 shows that the
remained strong in the major emerging markets,
chemical industry has been a strong performer,
boosting the growing chemical industries in
outpacing most of its major customer in-
those countries as well as generating export
dustries in recent years. As “A capital-markets
demand for established chemical production
perspective on chemical-industry perfor-
centers in Europe, North America, and Japan.
mance” explains, the analysis contradicts one
But demand has also proved more resilient in
element of conventional wisdom by showing
the developed world than had been feared in
that there is no empirical basis for the commonly
the darkest days of early 2009. US producers in
held view that capital markets favor less cy-
particular have confounded doomsayers and
clical specialty-chemical companies over com-
ridden the shale-gas boom that has brought a
modity or diversified companies. Instead, the data
low-price ethylene feedstock bonanza.
show that capital markets base their valuations
Nevertheless, the crisis has certainly affected the
regardless of company type. We also analyzed
industry significantly. As our first article
the capital-markets performance of a sample of
shows, it has accelerated shifts in the global
companies through the crisis, an exercise that
industry’s long-term makeup. “Chemicals’
showed that markets rewarded companies that
overwhelmingly on past operating performance,
Article title here
3
took rigorous action—again underlining
translation of lean principles to the area of
the market’s focus on operating performance.
energy consumption.
Proceeding from the general to the parti-
Our last two articles focus on marketing and sales
cular, our next two articles address themes that
topics. With the chemical industry in recovery
are consistently high on the priority list for
mode and enjoying a volume and margin rebound,
senior chemical-industry management—innovation
marketing and sales is a particular concern
and energy. Innovation remains a major area
for senior management. “Improving pricing and
of opportunity for chemical companies, and one
sales execution in chemicals” describes
of the most successful practitioners of inno-
an approach that enables companies to achieve
vation in the chemical industry is Dow Corning,
greater transparency on product and account
though it is not necessarily among the
profitability and sales-force actions; companies
best recognized as such because the company is
adopting the approach have improved their
privately held. We sat down with Dow Corning
return-on-sales performance, in some cases sub-
CEO Stephanie Burns and Gregg Zank, its chief
stantially. The second article, “Kick-starting
technology officer, to talk about their approach to
organic growth,” describes how to apply a
both new-product innovation and business-
more granular lens to discovering new market
model innovation—an area in which Dow
prospects—micromarkets—and explains how
Corning’s Xiameter brand has been a trailblazer.
chemical companies can then move to capture these opportunities.
Climate change has dropped down many CEOs’ agendas in the year since the Copenhagen
In this and future issues of McKinsey on Chemicals,
conference, and with it the urgency to reduce
we will bring you the best of our thinking in the
energy consumption and in that way reduce
field. We trust that you will find the publication
carbon dioxide emissions. However, energy prices
thought provoking, and we welcome your feedback
remain at high levels, and energy savings
and suggestions for topics to cover in addition
continue to present an important area that is
to those we are already working on. Please write
worthy of focus. In “Capturing the lean
to us at McKinsey_on_Chemicals@McKinsey.com.
energy opportunity in chemical manufacturing,” we describe a new approach to improve energy efficiency based on an adaptation and
Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice. Tomas Koch
(Tomas_Koch@McKinsey.com) is a director in the Seoul office and leader of the Asia chemicals practice. John Warner
(John_Warner@McKinsey.com) is a director in the Cleveland office and leader of the Americas chemicals practice.
4
Chemicals’ changing competitive landscape
High energy prices and the global economy’s eastward shift are creating new chemical-industry leaders who play by different rules. Newcomers must build capabilities to sustain their success, while incumbents must sharpen their value propositions to compete.
Florian Budde
A major shift in the competitive landscape of the
in a high-oil-price world, and privileged access to
worldwide chemical industry is under way as
the most attractive consumer-growth markets.
new players from oil- and gas-producing countries and the high-growth developing markets of
While newcomers may be better placed than
China and India join the industry’s top ranks in
incumbent chemical companies in Europe, North
sales. The new players focus on resource
America, and Japan, the shift creates challenges
monetization and economic development, in
for both groups. If the newcomers want to
contrast to the classic shareholder value-
establish themselves as industry leaders in the
creating goals that have historically informed the
coming decades and fully realize the industry’s
strategies of top players.
wealth-creating and society-supporting potential, they must evolve rapidly. They should move
Not only are these newcomers playing by different
beyond simply monetizing their cost- and market-
rules, but they are also better placed to ben-
advantaged positions to build capabilities that
efit from two of the key dynamics driving the
will put them on more equal footing with incum-
industry’s future: control of advantaged feedstocks
bents when it comes to management, innovation,
5
and marketing performance. At the same time,
Closely related to this is the third major change—
to assure continuing success in this new
the arrival among the chemical industry’s
landscape, incumbents must reconsider their po-
leadership ranks of companies based in
sition in the industry and adapt their strategies
hydrocarbons-producing countries and in large,
and priorities accordingly. Newcomers and
high-growth developing markets such as
incumbents that can take these steps will be well
China and India. The simpler value propositions
positioned to ride the global chemical industry’s
of the new players are in some ways on a
continuing profitable growth trajectory.
collision course with the value propositions of the traditional players, and the disruptive potential
A changed industry
of this development is only gradually coming
Coming out of the financial crisis and economic
into view.
slowdown of the past two years, the global chemical industry is seeing major changes. The
The industry’s leading incumbents have operated
first relates to energy-price dynamics. The
for the past two decades with similar goals:
chemical industry is confronting unprecedented
striving to increase shareholder value based on
hydrocarbon price volatility. In addition, energy
their technology portfolio and asset base, and
prices are significantly higher than they have been
making opportunistic excursions from traditional
for the past two decades—and they are higher
home markets to tap emerging-market growth.
than they were coming out of previous recessions.
Whether the companies were based in Europe,
While there is little progress on climate-change
North America, Japan, or South Korea has
regulation, which could add carbon tax–related
only added nuance to this common approach.
costs for chemical companies in certain regions, the industry is nevertheless seeing increasingly
In contrast, for governments and their production
pronounced divergences in gas and electric power
subsidiaries from hydrocarbons-rich countries,
prices among regions. Overall, the degrees of
chemical manufacturing represents an opportu-
cost advantage and disadvantage among regions
nity to monetize advantaged feedstock re-
have increased.
sources and build industries that will provide jobs for their rapidly expanding populations—even
Second, the economic downturn has highlighted
if it will have a detrimental effect on industry
the accelerating shift in the growth of global
structure and profitability.
chemical demand from developed economies to the developing world. While demand in
For leading companies based in fast-growing major
Europe and the United States has not returned
emerging markets, chemical production is seen
to pre-crisis levels and seems unlikely to do
as a necessity to provide the products needed for
so until 2012, China’s chemical demand increased
continued economic expansion. Lower labor
by 6.4 percent in 2009 and by over 15 percent
costs in these countries translate into competitive
in 2010. Meanwhile, new petrochemical capacity
capital-investment and operating costs for
in the Middle East continues to expand, while
these companies, many of which are owned by
plant-closure announcements have multiplied in
the state or by families that have close ties to
Europe, Japan, and the United States.
the government. These companies can establish
6
McKinsey on Chemicals Winter 2011
Building a worldwide market presence will require that newcomers take steps to establish international operations and build up the management skills to run those operations successfully production to capture local market growth,
entry has been built on production, taking
and they are little concerned about any resulting
advantage of their lower cost base to establish
global supply-demand imbalances for the
a presence based on price in their export
chemicals in question.
markets. This is a logical approach and a natural entry point. But it tends to result in the
Importantly, both groups of newcomers include
commoditization of the market and a strict focus
many government-backed companies. As a
on the lowest price, and it therefore risks
result, these companies can invest on a scale that
destroying a lot of the value that exists in the
is much greater than even the largest traditional
market for the new entrants as well as for
chemical-industry players.
existing players.
These changes have been building for years, but
There have been numerous examples of compe-
their importance is hard to overstate. In sum-
tition from new low-cost producers that has
mary, incumbents that have ridden growth in
reduced prices well below the level that would
developed and developing markets are now
assure them a foothold in developed markets,
undercut by powerful new rivals with access to
in products as varied as polyethylene terephthalate
cheap feedstocks and the most attractive
and fluorochemicals. Similarly, Chinese specialty-
growth markets.
chemical products are often sold in developed markets in North America and Europe on a
The new competitive dynamics pose important
specification basis through third parties, which
questions for both newcomers and incum-
means that the Chinese producers are cut off
bents about the steps they must take to assure
from customers and have limited insights into
their continued success. For the newcomers,
market dynamics.
the choices are arguably more straightforward than for the incumbents, which have large
As new players build their presence in the
legacy businesses to reposition.
industry, they must develop capabilities to sustain their growth and look more ambitiously at the
Newcomers must develop world-class
kind of profile they want to create. As a first step,
capabilities
they must establish their own R&D and inno-
For new producers—whether based in feedstock-
vation capabilities, which will enable them to offer
rich countries or high-growth emerging-
differentiated products and make them less
market countries with low labor costs—market
dependent on incumbents for technology.
Chemicals’ changing competitive landscape
7
Second, new producers must start to build
overseas locations will be a new challenge for
marketing capabilities that will enable them to
these players’ senior-management teams.
move beyond selling simply on low price and reap the full economic benefits from their products.
Incumbents must reappraise their
They must develop expertise in approaches
opportunities and adapt
such as differentiated marketing, transactional
Established producers in Europe, Japan,
pricing and value pricing, and sales-force
South Korea, and to an extent North America
management. This is a need shared by all new
will have to take steps to adapt to lower
producers, whether they are manufacturing
overall demand-growth rates for chemicals
for export or meeting surging demand in
in their home markets. Clearly, there are
home markets.
segments of the industry in mature, developed markets that continue to enjoy good prospects
Developing these capabilities will help new
and that are relatively safe in the new competitive
producers get better returns from their current
landscape. These divide into two main areas,
product range and avoid leaving money on
upmarket and down-market, where there will be
the table from selling at unnecessarily low prices.
niches that are relatively impregnable.
Doing so will become even more pressing as new producers expand their portfolios to include
The first area is chemical-industry segments
more sophisticated and higher-value-added
in markets that require customer intimacy and a
products, from which they will want to extract
high level of service support. Examples include
maximum value.
flavors-and-fragrances companies that have developed superior customer insights and ex-
Becoming worldwide suppliers will require new
clusive manufacturing know-how to support
producers to establish marketing and sales
customer demands; coating companies that
capabilities in developed markets that are sophis-
manage the painting of automobiles within the
ticated enough to support this type of product.
production line; leather chemicals, where
Many of these products will require a completely
the producer works closely with luxury-goods
different type of sales approach—one that is
makers; and water-treatment and construc-
capable of dealing with product-approval regis-
tion chemicals. In all these cases, customer inti-
trations, gaining intimacy with customers’
macy makes them less vulnerable to inroads
product-development programs, and getting
from low-cost offshore competitors. The second
products specified for these programs.
area is a group of basic chemicals where the low prices mean that importation is not viable;
Third, all of the above moves related to building a
this includes such products as sulfuric acid,
worldwide market presence will require that
hydrogen peroxide, industrial gases, and, to an
newcomers take steps to establish international
extent, caustic soda. These are, and will continue
operations and—most important—build up
to be, regional markets.
the management skills to run those operations successfully. Whether such operations are
Where incumbents must look especially carefully
established through acquisitions or built from
is at the many market segments between
scratch, creating and running subsidiaries in
the two poles. In many of these segments, lower
8
McKinsey on Chemicals Winter 2011
demand growth is likely to translate into the
cover all domestic demand volumes, and for the
consolidation of players in certain sectors
surviving incumbents that can manufacture
and capacity closures. Producers in Europe,
domestically at below the cost of imports, this
North America, Japan, and South Korea
evolution can be positive if it results in a more
have historically been net exporters of chemicals,
clearly structured and disciplined market with
but for many product areas, their export cost
pricing based on import-price parity.
position will become less and less competitive.
They already face cost disadvantages on raw
It is also important to emphasize that across all of
materials and must confront disadvantages on
their businesses, incumbents must work hard
two other scores: incumbents’ domestic plants
for functional excellence with regard to low-cost
are not only in the wrong place to serve emerging
operations and lean and effective marketing
growth markets such as China, but they also
and sales. In the face of the growing competition
tend to be older installations that have intrin-
from newcomers, incumbents cannot afford
sically higher costs than the new world-scale
any slack in their businesses and must make sure
production capacity that is being installed in the
they are top-class operators in all areas.
new growth markets.
Riding the new market-growth waves
Successfully managing the transition to this
Next, incumbent companies must look beyond
lower-growth mode will require that
their home markets and consider how they
incumbents evaluate their product portfolios
can ride the dynamics that are transforming the
and manufacturing footprints. They must
industry—the rise of chemical production in
also decide in which sectors they want to be con-
feedstock-advantaged countries and the shift in
solidators, with an eye to becoming the “last
demand growth to emerging markets. Incum-
man standing,” and in which sectors it would
bents must ask themselves how they can
make more sense for them to be among the
join up with the new players, whether by estab-
companies being consolidated.
lishing a presence in a resource-rich country or by building capacity in China and other high-
Companies must bear in mind that as the industry
growth markets—or by doing both.
landscape shifts, the relative attractiveness of products will change, with some more vulnerable
They must then consider what they can do to
to the trends in the industry than others. They
enhance and maintain their attractiveness as a
must look at their portfolios accordingly. Estab-
partner. Many incumbents operate broad
lished markets are becoming net importers of
portfolios of businesses; these companies must
a growing range of chemicals, as new feedstock-
think about how they can clarify and best
advantaged producers can profitably serve these
articulate the value proposition that they bring
markets. While imports frequently lead to lower
to their potential partners. High on any list
prices and reduced margins in the short term,
will be innovation—creating new technologies
this is not always the case in the long run,
and products—which has always been a route to
particularly if incumbents are willing to shut part
profitable growth in the chemical industry
of their capacity. Imports are rarely able to
and remains an area of strength for incumbent
Chemicals’ changing competitive landscape
9
chemical companies. Companies that have
The global chemical industry has entered a new
technology that is needed by oil-producing coun-
phase in its evolution, as players from oil-
tries to use in their new petrochemical plants
producing countries and high-growth developing
will be best placed in any contest to participate in
markets take their places among the industry’s
joint ventures. And companies with know-
leaders. These new players are focused on resource
how that is much in demand in rapidly growing
monetization and economic development—and job
emerging markets will be of greater interest
creation in particular, in a number of countries—
to those countries’ governments; they are thus
rather than on traditional shareholder value, and
better placed to gain access to such markets.
they thus play by a different set of rules than do the industry’s traditional leaders. As a result, the
Incumbents must also think about how the market
competitive landscape is changing. Incumbents
access that they could provide in their home
must recognize the shift under way and adapt,
market could be valuable to new producers. They
while newcomers should build new capabilities to
should consider the best way to make this
more fully deploy their strengths in the market.
available. One possibility is to act as a joint-venture partner with a new producer in a way that
As the world economy picks up speed after the
would enable the incumbent to gradually ramp
crisis, senior managers are understandably
down its own production.
preoccupied with navigating back to “business as usual.” However, the shifts in the chemical-
Finally, incumbents must recognize the strategic
industry landscape we have described above have
choices that they face. What kind of bar-
arguably been accelerated by the crisis, as the
gaining chips does the company have, and what
major emerging economies have recovered faster
types of chips might it want to develop? Is it
than the developed ones. As a consequence, the
strong enough to stay independent? Should it
window of opportunity for incumbents to engage
consider partnerships or alliances? Does a
with newcomers could close sooner than
focus on the Middle East make more sense than a
they might expect. The number of exceptionally
focus on China? And if a company decides to
resource-advantaged countries is finite, and
focus on China, should it try to ally with a Chinese
major emerging markets such as China may pursue
player or to establish a greater direct presence
a policy of favoring domestic champions. Incum-
in China? Companies must think carefully about
bents should use any momentum gained from
how to play their bargaining chips for maximum
recovery in their traditional businesses to advance
value creation—these chips cannot be used
their positions in the new industry landscape.
multiple times.
Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice.
10
A capital-markets perspective on chemical-industry performance
Long-term analysis shows that capital markets base their valuations of chemical companies above all on past operating performance. It also shows there is no basis for the commonly held belief that investors prefer noncyclical specialty stocks.
Florian Budde,
Geert Gyselinck, and Christoph Schmitz
The long-running debate continues within the
data from 1994 to 2009 for more than 100
chemical industry over which strategies offer the
chemical companies worldwide, accounting for
road to the best shareholder returns. Much
approximately 70 percent of the total global
senior-management time has been taken up de-
chemical-industry market capitalization.1 This
ciding whether to focus on a specialty, com-
has enabled us to review the performance
modity, or diversified portfolio and whether to
of individual companies (with figures adjusted
take the business closer to the customer,
where necessary to make comparisons pos-
move upstream, or many other plays; a number
sible) and the different chemical sectors, as well
of leading chemical players have recently
as the performance of the chemical industry
made M&A moves to bolster their specialty profiles.
relative to other sectors.
But what is the verdict of the capital markets, the
The analyses show that capital markets do
arbiter of value creation, on these questions?
not regard chemical companies’ sector affiliation—
Since capital-markets performance provides the
specialty or commodity—as an indicator for
ultimate test of shareholder value creation, we
superior or inferior performance. What does stand
compiled 16 years of financial and stock-market
out is that capital markets are above all
11
focused on return-on-invested-capital (ROIC)
construction, with electronics the only major
performance and its development over time, and
customer segment to do better. This capital-
they base valuations on this performance rather
markets performance suggests that the chemical
than on expectations of growth—a dimension
industry on aggregate occupies a desirable
where the markets are seeing little differ-
point in the value chains in which it participates,
entiation between companies. Consistent across
which enables it to capture its fair share—or
the period is that capital markets remain
even more than its fair share—of value.
sensitively attuned to individual companies’ performance trajectories. This was demonstrated
This performance should ease the concerns of
dramatically during the crisis when, as the sidebar
chemical-industry management teams that have
on p. 18 shows, companies that took aggressive
been considering moving their companies closer
steps to cope saw their valuations rebound more
to end consumers in the hope of gaining valuation
quickly than those of more passive competitors.
upside in capital markets, since most customer
Capital markets see chemicals as a
value than chemicals. The performance should
industries have been less successful at creating strong performer
also be a consolation to senior-management
The long-term data show that the often-held
teams that have felt on the defensive in the past
perception of the chemical industry as
few decades because of negative public
sluggish and unattractive is largely unjustified.
perceptions of the chemical industry due to its
From a capital-markets perspective, the chem1
Our analysis covers 100
chemical companies, each with sales of more than $1 billion per year, with an aggregate market capitalization of roughly $900 billion. Based on market capitalization at the end of
March 2010, this accounts for an estimated 70 percent of the total market capitalization for chemicals.
In most of our analysis, we excluded Saudi Basic
Industries Corporation
(SABIC), given that its high market capitalization would have introduced a bias.
We gathered various performance metrics (for example, total return to shareholders, trading multiples, return on capital, cost of capital, and capital efficiency) but hand-adjusted reported numbers to make possible easier peer comparisons, for example, correcting for nonrecurring items, pension adjustments, operating-lease adjustments, and financial activities.
environmental impact. These teams have
icals sector is a strong performer: shareholder
been wondering how to gain favor from investors
returns for chemicals have performed in line
and the public by remaking their businesses as
with global markets over most of the past 16 years,
something other than chemical companies, at
and outperformed the market average since
least in name, as evidenced by the lack of newly
2004. The exception is the period around 2000,
spun-off chemical companies with “chemical” in
when the dot-com bubble inflated technology
their names. Capital markets, in contrast, appear
stocks and the overall market.
to have taken an unsentimental view on these issues; they are quite happy with the performance
The fertilizer sector has performed particularly
of the chemicals sector (Exhibit 1).
strongly on total return to shareholders (TRS) since 2006. While overall chemicals, excluding
Not a growth play as an industry—but a
fertilizer, showed a compound annual growth
solid earner
rate of 5.8 percent per year between 2006 and
Capital markets provide a valuable perspective on
2010, fertilizer achieved 39.1 percent. This has
how the chemical industry should regard
put fertilizer companies among the highest-valued
itself—whether it should still look at itself as a
chemical companies.
growth play or rather as a middle-aged industry that is past its best days. For many chemical-
Not only have chemicals outperformed the market
company top-management teams, it has been
in recent years, they have outperformed many
somewhat painful to adjust to the reality
of their major downstream customer industries,
that since at least the mid-1980s, the chemical
such as automotive, consumer goods, and
industry has been a mature industry—albeit one
12
McKinsey on Chemicals Winter 2011
McKinsey on Chemicals 2010
Capital Markets
Exhibit 1 of 7
Exhibit 1
The chemical industry has outperformed the market and most of its customers in recent years.
Total return to shareholders, $
Indexed, 100 = December 31, 1993
1,000
Oil and gas
Electronics
Chemicals
800
Chemicals (excluding fertilizer)
Global market
Consumer goods
Construction and building
600
Automotive
400
200
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update
that is profitable, still growing, and earning its
components of capital-markets valuation, ROIC
cost of capital—and the mantle of “growth
and growth expectations, across all companies
industry” has passed to information technology
in the analysis set. To do this, we calculated the
and other sectors. This has led to much soul-
correlation coefficient between valuation (with
searching, as companies have attempted to find
regard to its enterprise value to invested capital, or
the right balance between taking an innovation
EV/IC, ratio) and operating profitability (ROIC
stance—chemicals’ historic ticket to growth—and
before taxes). This calculation showed that in 2009,
focusing on squeezing cash out of their busi-
the correlation coefficient was at the very high
nesses, an exercise further confused by the key
level of 0.85, suggesting that the market was
enabling role of chemicals in many “hot”
basing the largest portion of the valuation of
sectors such as solar and electronics.
chemical companies on income performance, with only a limited portion of the value attributed to
What do the markets say? To get to an answer, we
variations in expectations for individual company
analyzed the relative size of the two key
growth (Exhibit 2).
A capital-markets perspective on chemical-industry performance
13
Furthermore, our analysis shows that ROIC per-
and diversified. Put another way, it is increasingly
formance became the key determinant of
hard for chemical companies to make a credible
chemical-company valuation in the eyes of capital
argument about growth prospects to shareholders.
markets over the past decade and that capital markets have observed less differentiation in
McKinsey on Chemicals 2010 growth expectations for companies across the
Capital Markets three sectors that the chemical industry is
Exhibit 2 of 7 commonly segregated into: specialty, commodity,
Exhibit 2
That does not mean the markets expect the industry to stagnate: on the contrary, the markets expect companies to maintain at least 4 to 5 percent annual growth in a global market growing
Valuation of chemical companies happens on a ‘show me the money’ basis.
Commodity
Specialty
Other
Average WACC2
Empirical valuation tendency
Diversified
Valuation level
Enterprise value/invested capital (EV/IC)1
Companies linked to agriculture
7.0
6.0
Valuation premium
5.0
4.0
Correlation coefficient: 0.85
3.0
2.0
Valuation discount
1.0
0.0
0
10
20
30
40
50
80
Operating profitability
Return on invested capital before taxes, 2009E, %
1IC including goodwill, 2009E market data as of February 26, 2010; IC = 2008 adjusted for latest quarter (2009)
property, plants, and equipment; 2009 consensus estimate for earnings before interest, taxes, and amortization.
Note: EV = market capitalization + debt + minority interest and preferred shares – total cash and cash equivalents.
2Weighted average cost of capital.
Source: Bloomberg; Datastream; McKinsey chemicals capital-markets perspective, 2010 update
14
McKinsey on Chemicals Winter 2011
overall at 3 percent. The overall capital-markets
In addition, capital markets are attributing growth
view is that the industry is mature and that it
prospects to Taiwanese companies well-placed
is unlikely that many companies will be able to
to serve Chinese demand growth, to chemical
create outstanding growth stories, but markets
companies in the high-growth enzymes sector and
certainly like the shareholder returns it provides.
in research chemicals for the life-sciences industries, and to chemicals and services for the
Rewarding individual growth stories
hospitality industry.
This observation about the growth profile of the chemical industry in aggregate, however,
Thus in the market’s view, the chemicals sector
should not obscure the fact that there are some
does include areas with growth prospects.
growth stories that do impress capital
However, to consistently impress markets, top
markets. The markets have rewarded such com-
management must first make sure that the
panies with valuations that exceed their
company excels in ROIC performance.
performance strictly based on income, which means that value is being attributed to the companies’ growth prospects.
A dynamic sector, where success gets rewarded and weakness is punished
The capital-markets perspective underlines the
As mentioned above, the fertilizer sector has
degree to which the chemical sector is dy-
recently enjoyed peak valuations and, along with
namic. This is shown by the fact that there con-
other chemical companies serving the agri-
tinues to be significant mobility across all the
culture sector, has made up the largest group of
industry’s valuation-performance quartiles—
“growth” chemical companies in the immediate
demonstrating value creation (as well as value
pre-crisis period. The agriculture sector received
destruction) and making clear the high degree of
a certain degree of hype in the late 2000s with
sensitivity with which stock markets are fol-
the general commodities boom, the biofuels fad
lowing the performance of individual companies.
and related government subsidies, and food-
For example, among top-quartile companies
shortage scares. This has resulted in capital-
in 2008, fewer than half were in the quartile a
markets excitement about fertilizer stocks,
decade ago. At the same time, 16 percent of
particularly those in the potash sector. Crop-
top-quartile companies in 2008 had been bottom-
protection-chemicals and seeds companies
quartile companies in 1998, while 25 percent
also rode the same wave of market enthusiasm.
of bottom-quartile companies in 2008 had been
There continues to be significant mobility across all the industry’s valuation-performance quartiles—making clear the high degree of sensitivity with which stock markets are following the performance of individual companies
A capital-markets perspective on chemical-industry performance
15
McKinsey on Chemicals 2010
Capital Markets
Exhibit 4 of 7
Exhibit 3
Capital markets remain highly alert to changes in performance trajectory.
Distribution of valuations in the chemical industry: changes in one decade
Enterprise value/invested capital1 distribution …
Median of quartiles, 2008
… and where it came from2
%, 1998
1st quartile
2nd quartile
16
1st quartile
2.0
2nd quartile
1.2
3rd quartile
4th quartile
3rd quartile
11
41
4th quartile
32
1.0
26
0.8
52
11
11
1
Including goodwill. new entrants.
2 Excluding
Source: McKinsey chemicals capital-markets perspective, 2010 update
in the top quartile in 1998. That mobility reflects
What strategies best drive chemical
the nature of this complex and fragmented
stocks’ performance in capital markets?
industry, where changes in end-user demands and
What guidance does this analysis provide on how
raw-material costs give companies opportu-
strategy correlates with strong performance?
nities to innovate and redefine their products and
Since chemical companies’ strategies are hard to
services in specific markets and geographies.
classify, competing as they do in a range of product and geographic markets, we chose to
Thus, even though capital markets are showing an
examine performance relative to some easily
increasing assumption that growth differentials
measurable dimensions of how a company
between chemical companies are converging, if a
operated—such as scale, product and portfolio
company changes its performance trajectory,
focus, or geography. That analysis let us test
capital markets are perceptive and reflect these
a number of hypotheses about what drives value
changes in valuations. As a result, some
creation, defined as total return to shareholders,
companies move up and some drop down. The
market-to-book valuation, and ROIC. Using data
message from capital markets to senior-
from 1994 to 2009, there are a number of
management teams: do not rest on your laurels—
observations that can be made.
and if you are down, do not despair (Exhibit 3).
16
McKinsey on Chemicals Winter 2011
McKinsey on Chemicals 2010
Capital Markets
Exhibit 5 of 7
Chemical segments perform roughly in line with one another.
Exhibit 4
Cumulative total return to shareholders1
$, indexed: 100 = December 31, 1993
500
Specialty
Diversified
Commodity
400
Compound annual growth rate, %
300
Specialty 8.8
Diversified 8.0
200
Commodity 7.8
100
0
1
1994
1996
1998
2000
2002
2004
2006
2008
2010
Sample excludes Saudi Basic Industries Corporation (SABIC) and fertilizer companies.
Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update
Portfolio. Our analysis shows that all the chemical
To achieve top-tier performance, portfolio seems
segments (specialty, commodity, and diversified)
to play a role—but it is not portfolio in the sense
performed roughly in line with one another from certain segments during certain limited time
Bartels, and Florian Budde,
“Multiple choice for the chemical industry,” www. mckinseyquarterly.com, August 2003, and Thomas
Augat, Eric Bartels, and
Florian Budde, “Structural drivers of value creation in the chemical industry,” in
Value Creation: Strategies for the Chemical Industry,
Weinheim, Germany: WileyVCH Verlag, 2006, pp. 27–39.
nuanced and specific to certain subsectors. It is impossible to make comparisons at the level of
periods. For example, analysis that we undertook
2
See Thomas Augat, Eric
of specialty versus commodity. Instead, it is more
1994 to 2009. Capital markets have favored
companies, as most companies have different
of the 1992 to 2003
period2
showed that
diversified companies performed best, followed by
portfolios, but it is possible to identify the performance of individual businesses.
specialties; commodities performed worst.
However, when we extend the analysis to 2009, it
Our return-on-sales (ROS) analysis of individual
becomes difficult to identify a consistent trend
businesses shows that while some sectors clearly
over time. Put another way, portfolio differences
have higher ROS, the spread of performance by
for specialties, commodities, and diversified
sector participants is quite large. For example,
players have not translated into better or worse
specialty electronic chemicals achieved higher
performance; all segments are in line with one
ROS from 2001 to 2008 than basic electronic
another (Exhibit 4).
chemicals. However, the variations in performance
A capital-markets perspective on chemical-industry performance
17
around the average are substantial, and so
lackluster sector, or, if the company is determined
performance has to be assessed on a company-by-
to switch, make sure it can become a top
company basis (Exhibit 5).
performer in the attractive sector. Presence in an attractive sector is no guarantee of success—
This holds a clear message for senior-management
performance in ROIC.
ensure that it cannot improve performance in the
Exhibit 5
and neither does it provide an excuse for poor
McKinsey on Chemicals 2010 teams. Before rushing to abandon apparently
Capital Markets dowdy sectors and trying to move into supposedly
Exhibit 6 of 7 more attractive sectors, management must first
analysis that we undertook focused on whether
Megatrends. One further portfolio-related
The average profitability of a business segment is no guarantee of success: participants show wide variations in performance.
Performance spread around average
Average return on sales in segment, 2001–08, %
Segment1
–10
Specialty electronic chemicals
Industrial and institutional cleaners
Flavors and fragrances
Catalysts
Cosmetic chemicals
Crop-protection chemicals
Specialty
chemicals
Pigments
Plastic additives
Coatings
Construction chemicals
Specialty polymers
Adhesives and sealants
Advanced composite materials
Water-management chemicals
Active pharmaceutical ingredients
Basic electronic chemicals
Commodity chemicals Bulk polymers
Fertilizers
Basic organics/petrochemicals
Fibers
1Based
on SRI segmentation.
Source: Bloomberg; Reuters; SRI International; McKinsey analysis
0
10
20
30
40
18
McKinsey on Chemicals Winter 2011
Lessons from the crisis:
The market rewards tough actions and rigorous management
We analyzed capital-markets performance
up of two segments: first, companies that
during the financial crisis to understand lessons
were recognized as untouched by the crisis
on how companies should respond to challenges.
(for example, companies making flavors and
We examined the total-return-to-shareholders
fragrances and serving the food industry
(TRS) performance of a representative group of
or high-end luxury-goods sector), and second,
22 chemical companies, from an all-time high on
companies that visibly reacted to the crisis
June 17, 2008, to March 25, 2010.
with cost-cutting and restructuring moves, which set them up to come out of the crisis stronger
When the economic crisis started in autumn
than before. Both these types of companies saw
2008, the initial response from the capital
capital markets move their stock prices up,
markets was to drastically reduce the value of
with top-quartile performers up 72 percent in
the chemical sector as a group, just as it did to
the period.
all other sectors and to the market overall. This phase continued through March 2009, with little
At the other extreme were companies that were
difference between top-quartile performers
hit hard by the crisis, primarily because of the
(TRS was down 48 percent) and bottom-quartile
weakness of their balance sheets going into the
performers (TRS was down 66 percent). But
crisis or because the capital markets recognized
when the capital markets started to get over
their existing strategies would not be successful
the initial panic and recover their senses,
in the “new normal.” Their valuations remained
they revised this initial judgment and showed
depressed, recovering only 28 percent. In the
appreciation for the differences between
middle were companies that did not react
individual chemical companies’ performance
aggressively to the crisis and were waiting for the
and prospects.
storm to pass. Many such companies had robust business models, but by failing to make
This led to a segmentation of chemical
rigorous moves to cut costs and improve
companies during the recovery phase from
operations, they emerged weaker relative to
March 2009 to March 2010 (exhibit). At
companies that seized the opportunity for action
one extreme was a group of companies made
presented by the crisis.
A capital-markets perspective on chemical-industry performance
19
These events provide a clear indication that
While the crisis was a short period of exceptional
McKinsey on do respond to 2010 capital markets Chemicals individual
Capital Markets and actions. Management companies’ situations
Sidebar exhibit decisively and took highly teams that reacted
capital markets: chemical companies should
stress, it confirms the enduring message of the keep their focus on strong ROIC performance.
visible actions were rewarded by the markets.
Exhibit
Patterns that emerged during the crisis show capital markets favored companies that seized cost-cutting opportunities.
Median annualized total return to shareholders: all-time high to turning point1
%
1st quartile
24
• Companies
with rigorous and visible restructuring efforts
(niche) players that were dragged down with the flow and have now recovered
• High-performing
2nd quartile
–1
• Players
weathering the storm with robust business models that continued to operate as usual after the crisis
• Companies with limited or moderate restructuring efforts but lasting exposure to the crisis
• Companies
3rd quartile
4th quartile
–16
–38
• Companies
with tight liquidity and/or refinancing needs growth stocks without a new post-crisis formula; these players have been set back to normal
• Former
1From
all-time high on June 17, 2008, to March 25, 2010; indexed with starting date of June 30, 2008.
Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update
20
McKinsey on Chemicals Winter 2011
capital markets have favored chemical companies
the consistent message from capital markets is
that are linked to and riding global megatrends—
that any strategic move must focus on gener-
trends that are having a broad societal and
ating good ROIC performance. Any move related
economic impact worldwide. Looking at market
to megatrends must also bring strong ROIC
performance since 2005, we found that chemical
performance with it for it to be viewed favorably
companies associated with two megatrends—
by the markets (Exhibit 6).
population growth and the unconstrained demand for limited resources—have outperformed over-
Focus. Focused companies have performed better
all chemicals in capital markets. The first group
in recent years than unfocused companies. We
consists of chemical companies that supply to
define focused companies as those with more than
the agricultural and food industry (including
80 percent of sales in two businesses; unfocused
fertilizer, crop-protection-chemicals, and seeds
companies are those with less than 50 percent of
companies), and the second group comprises
sales in two businesses. The strong performance
companies with privileged access to natural
McKinsey on Chemicals 2010 resources through backward integration. What
Capital Markets chemical-industry senior-management teams
Exhibit 7 of 7 must remember, however, before trying to hitch
of fertilizer companies has helped amplify this trend, but even when fertilizer companies are excluded from the analysis, the superior performance of focused companies stands out.
themselves to one of these megatrends, is that
Exhibit 6
Companies associated with megatrends outperformed the broader market.
Cumulative total return to shareholders
$, indexed: 100 = December 31, 2004
700
Food-driven
Resource access–driven
600
Chemicals overall
500
Compound annual growth rate, %
400
Food-driven 26.2
300
Resource access–driven 14.2
200
Chemicals overall 8.1
100
0
2005
2006
2007
2008
2009
2010
Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update
A capital-markets perspective on chemical-industry performance
21
Size. For specialty chemicals, size clearly matters:
believed, for example, that investors prefer
larger specialty companies consistently out-
noncyclical specialty stocks to commodities, there
perform smaller ones on TRS. For commodity
is no empirical basis for such a claim. What
companies, larger companies outperformed
does stand out, however, is that capital markets
smaller ones until the crisis, but since then, per-
are taking a conservative view of chemical
formance has converged.
companies’ ability to differentiate themselves with regard to growth and instead are focused on
Region. Asian markets (excluding Japan) have
companies’ ROIC performance and its develop-
done well because of growth in the region;
ment over time. Markets are finely tuned to
economic growth translates into growth in demand
changes in the performance trajectories of indi-
for the chemical industry. Europe has also done
vidual companies, and winners must therefore
well, primarily because the European chemical
remain on top of their game. While capital-markets
index is largely driven by German companies,
performance in the past five years has shown
which have increased their productivity and taken
chemical companies that ride megatrends have
away share from non-German competitors in
excelled, experience has shown that capital-
the eurozone. Japanese companies continue to
markets favorites can quickly change. The message
be weak, and North American companies are
from the capital markets that endures, however,
somewhere in the middle.
is that ROIC performance matters above all.
Our analysis of the 16 years of data shows that capital markets do not regard chemical companies’ sector affiliation—specialty or commodity—as an indicator for superior or inferior performance.
Put another way, although it is commonly
Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice. Geert Gyselinck
(Geert_Gyselinck@McKinsey.com) is an associate principal in the Antwerp office. Christoph Schmitz (Christoph_
Schmitz@McKinsey.com) is a principal in the Frankfurt office.
22
Innovation in chemicals:
An interview with Dow Corning’s Stephanie
Burns and Gregg Zank
Dow Corning’s CEO and CTO talk about successful approaches to new-product and business-model innovation.
Bob Frei and Chris Musso
Dow Corning’s performance in the past decade is
large-scale plant in Zhangjiagang, China
one of the more overlooked success stories
(a joint venture with Wacker Chemie), which will
of the global chemical industry. Privately held by
complement its large-scale plants in the United
Dow Chemical and Corning, Dow Corning
States and the United Kingdom. Similarly, in
is the world’s top silicones producer and, through
polysilicon, Hemlock Semiconductor is building
its majority stake in Hemlock Semiconductor
a new plant in Clarksville, Tennessee, to main-
Group, the leading maker of polycrystalline silicon
tain its capacity and cost lead.
(polysilicon), the raw material for computer chips and solar cells. Dow Corning has historically
What is new is the acceleration of the company’s
seen steady growth, but in the past six years,
sales and earnings trajectory. Part of this
its performance has accelerated dramatically, and
is being driven by strong growth in demand in
innovation has played a key role in this.
developing markets such as China. Dow
Dow Corning has always grown by combining a
it in a strong position to serve this demand, but
Corning’s low-cost manufacturing base puts capability in low-cost bulk silicones with
the company is not simply sitting back while
leadership in silicon-based specialty chemicals.
it rides that wave. Instead, it has made a
It continues to follow this approach, with a new
significant push in innovation to strengthen its
23
growth momentum. It has drastically redesigned
2010; sales hit $4.4 billion and net income was
and reenergized its new-product-development
$615 million, putting it on a trajectory for its
approach, and at the same time has emerged as
best-ever results in 2010.
a chemical-industry leader in businessmodel innovation.
Stephanie Burns, a PhD chemist, has been Dow
Corning’s CEO since 2004 and has led these
In 2002, in the fading days of the dot-com
developments. She and Gregg Zank, the company’s
boom, Dow Corning took a bold gamble when it
chief technology officer and senior vice presi-
launched Xiameter, a new business model
dent, sat down recently at their Midland, Michigan,
comprising an online-managed, low-cost, no-frills
headquarters with McKinsey’s Bob Frei and
sales channel for its commodity silicones,
Chris Musso to discuss their perspectives on suc-
offering competitive pricing to customers willing
cessful innovation in the chemical industry.
to buy in bulk, without research or technical support. Plenty of other chemical companies were
McKinsey on Chemicals: Where does
dabbling in e-commerce, but none embraced a
innovation stand among your priorities?
business model that effectively divided the company’s products into two brands, as in this
Stephanie Burns: Innovation is definitely one of
case, where there was the traditional Dow
the very top priorities for the company. It’s our
Corning on the one hand, offering customers
future—it’s the way we’re going to grow. We divide
specialty silicones backed up by technical support
the very substantial growth we have achieved
and R&D, and Xiameter on the other.
over the past nine years into three categories, and there’s been a major innovation component to
Dow Corning confirmed the success of the new
all of them. The first is momentum growth, which
business model in 2009 when it announced
is directly linked to GDP expansion around the
a fivefold increase in the number of products it
world, and Xiameter has brought us a lot of growth
offers via Xiameter. Meanwhile, sales growth
there. The second is penetrating new geographies
based on new-product innovation has continued
with our technology, and innovation plays an im-
to accelerate.
portant role here because we’ll often do formulations that are specific for the geography or
The financial results bear this out. Dow Corning
employ innovative business models that allow us
saw sales rise from $2.49 billion in 1995 to $3.37
to expand in a particular region. The third
billion in 2004, when it exited from its nine-
category is more traditional, “pure” innovation—
year Chapter 11 bankruptcy protection linked to
new applications and products. All three cate-
breast-implant liabilities, a compound annual
gories have contributed to growth, with the biggest
growth rate of 3 percent. Net income rose from
shares driven by the second and third categories.
$153 million in 1995 to $289 million in 2004.
Its sales then rose 62 percent in the next four years,
McKinsey on Chemicals: How has your
reaching $5.45 billion in 2008, a compound
approach to innovation changed in the
annual growth rate of 13 percent, and its net
past decade?
income increased more than two-and-a-half times to $739 million. After a retreat in 2009,
Stephanie Burns: Ten years ago, our innovation
results rebounded in the first nine months of
approach was mostly the traditional, inside-out
24
McKinsey on Chemicals Winter 2011
materials-innovation approach. But we decided
McKinsey on Chemicals: How did you deal
that this approach was not working well—we
with the challenges and cultural issues within the
really needed to deliver greater returns from our
company when making this change?
strategic R&D investments. Reevaluating our approach to innovation has been part of a complete
Stephanie Burns: I think we have been suc-
rethink of Dow Corning’s business. Dow Corning
cessful in this because we defined a really clear
has always enjoyed respectable growth rates
business model—Xiameter—for our undiffer-
across most of its businesses, and for better or
entiated business. We have been very clear on what
worse this led to an attitude in the company
that brand represents and what its goals are for
that every business is a growth business, and an
cash generation and contribution to the earnings
attitude to R&D spending where everyone gets
of the company. That business model is all about
the same level of investment, and people across
efficiency and quality of supply to our customers
the company felt almost entitled to a certain
at a price point that allows them to really be com-
level of investment.
petitive. Customers are not asking for a lot of product innovation in that space, so that would be
But in the early 2000s, we could see that parts of
an area where we are not going to put research
our portfolio were maturing and becoming less
dollars, except toward process improvements.
differentiated, and the service-intensive specialtychemical approach to doing business was no
At the same time, we have been very clear on the
longer wanted by parts of our customer base. Those
differentiated side of the company about which
customers were mainly interested in the most
areas we wish to invest in and what our customer
competitive prices for undifferentiated products,
acceptance and financial expectations are, and we
backed by reliable supply. Seeing this and
have shifted resources to priority areas.
recognizing that there was going to be more of this trend coming was a major driver for us
We had to communicate clearly that it’s just as im-
in our design of the Xiameter business model. We
portant to work in area A as area B, and that
couldn’t treat those more price-sensitive and
both are critical to serve our customers. We’re
innovation-insensitive customers the same as our
going to create growth in each unit, but they
specialty customers. And so we separated our
have different mandates and deliverables. It has
product offering into two brands: the Xiameter
taken time to get the teams comfortable with
brand and the Dow Corning brand.
this, but now people see the success and so they are buying into it with great commitment.
Gregg Zank: And at the same time, we recognized
that we needed to rethink our approach to
I think that one advantage we have culturally is
new-product innovation across all our businesses.
that we have employees who are extremely creative
To get better returns, we saw that we couldn’t
and willing to try new things, and who do not
invest in every market the same, but we needed to
resist change the way that perhaps they do in some
be selective and choose those innovation areas
other companies. We’ve worked hard on encourag-
where we’re going to get the biggest returns and
ing the dynamic that it’s healthy to embrace change.
have the biggest impact on the company.
It comes down to leadership and clarity of purpose.
Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank
Stephanie Burns
Vital statistics
Born 1955
Married, with 1 child
Education
Graduated with a PhD in organic chemistry, with a specialty in organosilicons, in 1982 from Iowa State University Pursued postdoctoral studies at Université
Montpellier 2 Sciences et
Techniques, France
Career highlights
Dow Corning
(1983–present)
(2006–present)
Chairman
and (2004–present) chief executive
(2003–2010)
President
(2000–2003)
Executive vice president for global operations
(1997–2000)
Director of the electronics and life-sciences businesses and of science and technology for Europe
(1994–1997)
Director of women’s health
25
Fast facts
Incoming chairman of the
American Chemistry
Council
Member of the board of
GlaxoSmithKline and of the Society for Women’s
Health Research
Appointed to the
President’s Export Council in 2010
Named to Forbes.com’s list of the world’s 100 most powerful women
(1983–1994)
Positions in laboratory research, product development, science and technology, and business management This certainly has required changes in behavior.
Dow Corning—and add more clarity. We still
Take the salespeople in our specialty-chemical
had some undifferentiated products managed by
business: their job out in the field is to do new-
our specialty business, and by moving them to
business development and work with cus-
Xiameter, we have been able to serve our cus-
tomers on new areas of growth—it’s not to go in
tomers with more clarity.
and sell existing products to existing customers with the same application that they’ve
We will do that kind of fine-tuning constantly
sold for the past five years. So they’ve had a real
in the future. A product may currently be man-
change in their mandate.
aged by our life-sciences business or industrial-
With our relaunch of Xiameter in 2009, not
ture, we’re going to challenge the business every
intermediates business, but as the products maonly did we put more products into Xiameter but
year: should that be a Dow Corning–branded
we also continued to fine-tune these two busi-
product or should it be managed by Xiameter?
ness models—Xiameter and specialty-oriented
And we’ll move products over as appropriate.
26
McKinsey on Chemicals Winter 2011
Gregg Zank
Vital statistics
Born 1958
Married, with 2 children
(2002–03)
Program leader for newbusiness development
Education
Graduated with a PhD in inorganic chemistry in
1985 from the University of Illinois at UrbanaChampaign
(1985–2002)
Positions in research, product development, and new-business management Career highlights
Dow Corning
(1985–present)
(2009–present)
Senior vice president
Fast facts
Holds 30 patents for innovations including those related to advanced composites, rechargeable batteries, and hightemperature thermosetting polymers Reviewer with the National
Science Foundation
Member of the board of directors of the Michigan
Molecular Institute
Member of Michigan’s
Climate Action Council
Recipient of the American
Chemical Society’s Earle
B. Barnes Award in 2009
(2003–present)
Chief technology officer and executive director for specialties and technology
Meanwhile, we are getting new specialty products
the undifferentiated area. For instance, do we have
from our innovation efforts to expand our
intellectual property protecting our product,
Dow Corning portfolio that more than offset what
or are there a lot of similar products on offer from
is moved to Xiameter.
the competition? And when we go to visit the customer, are we meeting with the new-business
McKinsey on Chemicals: How do you know
developer or only with the procurement team?
when a product should move to Xiameter, and
That’s a pretty strong signal right there.
what are the challenges and opportunities?
Stephanie Burns: But it’s important to recGregg Zank: It’s not by our definition that a
ognize that there is a huge opportunity in the
product is no longer differentiated—it’s our
Xiameter model, not only in providing customers
customers’ and the marketplace’s. That in turn
with reliable supply at a certain price point but
reinforces the message within the company
also for the company overall as the low-cost,
that we have to embrace this new business model.
highly efficient supplier. We are winning at that
There are clear signals when a product is in
low-cost game, and we’re going to continue to
Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank
win. We’ve got fully utilized assets and efficiencies
the same time, there may be a need to explore a
in our manufacturing operations that we believe
new business model, packaging, or delivery
are the most competitive in the industry.
27
method, for example, to successfully deploy a product line in a certain region.
The offtake of the large, low-cost plants also goes into our specialty business, where we develop
Stephanie Burns: In business-model innovation,
finished, formulated products, and we get a lot
our big “aha” came with Xiameter. That really
more value than just selling the basic inter-
opened the door for us to think differently,
mediates. So the innovation that goes on in our
and we’ve realized that new business models are
specialty plants that leverages this low-cost
just as critical for new-product development as
position is a wonderful synergy.
they are in the more mature parts of our business.
We deployed new ways of working with our
And at the same time, there are a lot of innovation
partners: for instance, faster prototyping or finding
challenges posed by the Xiameter side of the
different ways to more quickly establish
business. For instance, how do we get a product
profitability. And in our polysilicon business, we
line’s cost down to stay competitive and make
have implemented new business models
the right level of return? There’s a lot of energy
designed to ensure that we meet our needs and
and excitement going into improving manu-
our customers’ needs.
facturing and process efficiency, as well as on the business and commercial side. It can be just
McKinsey on Chemicals: How do you steer
as exciting as new-product innovation.
your new-product innovation approach?
McKinsey on Chemicals: What are your
Gregg Zank: We want to focus on areas that are
thoughts on new-product versus business-model
driven by large societal trends and needs in
innovation?
the world—megatrends—because we know those trends are going to drive discontinuities in
Gregg Zank: It’s not black-and-white. The days
the marketplace. There are a number of areas we
are gone when you could just make a new
are particularly interested in. These include
product and customers would beat a path to your
health care and personal care, renewable energy,
door. To be successful in the marketplace
construction, and electronics—where we are
and establish a sustainable competitive advantage
looking at the ever-expanding demand for devices
requires a combination of approaches. The key
and the merger of electronics with other areas
for us is customer intimacy, which guides us as to
such as photonics and biotechnology. And we are
which levers of innovation we should employ—
watching how megatrends—such as energy scarcity,
how much new product and new technology, how
urbanization, and others—interact with these.
much new solutions, and how much businessmodel innovation. It’s also important to consider
When you’re tied into those discontinuities, it just
regional differences: mature products in one
means the market opportunity is big. You’re
region may be innovative products in another. At
not in there fighting tooth and nail using price and
28
McKinsey on Chemicals Winter 2011
other levers for a piece of a limited-size market—
that. We’re not just saying there’s a wonderful
instead you’re in a market that is expanding
megatrend out there in the demographic of an
rapidly. Light-emitting diodes (LEDs) are a great
aging population and we’re going to invest all our
example—they’re now showing up in flashlights,
projects against it, but instead, we’re defining
displays, traffic lights, and in automobile exteriors
where the opportunities are for Dow Corning.
and interiors, and they have the potential to
We’ve been improving that process and have
keep growing into areas of commercial and
started to integrate it across the company.
residential construction.
McKinsey on Chemicals: How does the
Encapsulants for LEDs have been a great success
process work?
story for us. We started the work in the late 1990s, and it became a new-business program in the
Gregg Zank: Our underlying challenge was to
early 2000s that was sheltered even though it was
improve the way we develop a raw idea into
not making any money. We backed it because
something tangible. The approach we now use is
we knew it was going to be a hit. We had key intel-
to work very intensively for a highly com-
lectual property; it’s a very enabling tech-
pressed period of time—10 to 12 weeks. We will
nology; and we were ready to go when the market
take something as large as the societal impact
was ready. Our encapsulant business has
of an aging population and distill that down with
grown dramatically over the past five years.
numerous interviews outside the company. We
We are on the lookout for developments that are
undertake a lot of strategic marketing—both
truly going to be disruptive and try to tie
technical people, who are in my opinion very good
ourselves to them. We constantly challenge our-
early-stage strategic marketers because they
dedicate a group of employees around the world to
selves and refresh that list of the large trends
ask a lot of difficult questions, and commercial
that we should be looking at, and then we ask, how
folks. Then we have weekly meetings to say, what
can silicon-based materials provide a solution?
have we learned about this area? It’s got to be a large opportunity, it’s got to get marketplace
Stephanie Burns: What we’ve been doing over
acceptance within a certain time frame, and it’s
the past four years is to take these megatrends
got to be something that is not incremental to
and apply filters that narrow them down to what
what we are already doing. We assess the
really could be the opportunity, and identify
applicability of our scientific tool kit against the
how best our technology and competencies match
opportunity and create an early proposal.
There’s a level of research expenditure that must be maintained even in tough times—it’s not discretionary spending; it’s required
Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank
We pressure-test the proposals from the points of
associated with them to represent a large area of
view of technology, the market, the supply chain,
29
growth for a significant amount of time?
and whether it will still be a good opportunity if some other external factors change. It is a difficult
Stephanie Burns: We also have to take some
thing for the team to go through because they
care managing the filtering part of the
want to chase five things and they only have time
process—this is the painful part, where you have
to get two worked up as full business proposals.
to let go of ideas early on that you don’t think
But I’m insistent that as we go through this, we
are a hit and stay focused on the ones that look
capture and document all the things that we leave
promising. When we started this process,
on the side as well, because they may be relevant
our people got so enthused by innovation and
for some of our other existing businesses. In
sustainability and improving our planet, and they
addition, the process can help us identify markets
were buying in fast and looking at things that
that are starting to move and make us check if we
we knew were not going to fly. But you’ve got to let
are in tune with them. Are they on our radar
them expand the lists of ideas, so that they say,
screen, and how are we interacting in the value
this is new and exciting, and to make sure they’re
chain of those markets?
going along the path with you. You can’t shut it off prematurely; you have to let it run its course.
We undertake this process twice a year. In addition to identifying opportunities, it completely
McKinsey on Chemicals: What are examples of
energizes the entire company, because there is
megatrend-linked work?
not only a core team but also a broader team that gets involved because there are Web calls for
Gregg Zank: One of the problems with the aging
information, where people can contribute, so
population is diseases that make bones brittle.
everybody is a part of it. We end up with a pretty
So you can look at ways to protect the human
robust portfolio of initiatives as the process
body from falls or ways to better enhance bone
cycle proceeds.
growth in aging people. Since there is research relating bone strength to silica intake, we said,
McKinsey on Chemicals: Have any cultural
is there a way to help uptake of silicic acid or silica
issues emerged with the adoption of the
into the body to help bones be less brittle? An-
megatrends approach?
other is enhancing aging bodies’ efficiency in absorbing medicinal drugs, and so, is there some
Gregg Zank: The danger we have run into is not
way to use silicones to help the uptake of drugs?
so much resistance as that everyone reframes what was already going on to be part of a mega-
Stephanie Burns: We also see megatrends
trend, and everything becomes a green-energy
intersect. For example, one of the trends
project or an aging-population project. That’s why
with an aging population is that baby boomers
we have these filters and say, OK, within the
want to live in their own homes rather than
aging population, what are the big things that we
in a nursing home. To take care of them and make
think we can have an impact on and that have
sure they’re safe, third parties observe them
enough discontinuities and opportunities
in their homes, and so there are new electronics
30
McKinsey on Chemicals Winter 2011
applications, as you get to surveillance
Stephanie Burns: I’d argue our chemistry
cameras and sensors. In other words, the elec-
set is probably more complex than most
tronics megatrend intersects with the aging-
companies’, and our expertise in that chemistry
population megatrend.
set allows us to do so many more things. I am constantly amazed at the potential of silicon
McKinsey on Chemicals: Dow Corning
technology to meet the needs of current and
seems to have shifted its R&D talent strategy to
future advanced applications.
include more than just silicone chemists, hiring physicists, materials scientists, and even
I think we are able to build closer and stronger
industrial designers. How has this new
relationships with customers because our
combination changed the innovation problem-
silicon-based expertise can be so enabling for
solving dynamic?
them. Take skin-care product makers: they use thousands of different ingredients to make
Gregg Zank: It’s a great new dynamic. When you
formulations, but the silicone ingredient
combine a silicone chemist with a material
enables that formulation to perform, and that
scientist, a ceramist, and a metallurgist, you get
gives us privileged access to their research
some very robust technology debates, and you
department. And we’ve deliberately built up
get to a good answer—not yet necessarily the right
a capability we call “application expertise,” where
answer—but one you have a lot more confidence
we have scientists who are world-renowned
in, because you did not just charge down one path.
experts in many of our customers’ applications.
In hair care, for example, we have globally
Stephanie Burns: Here’s an example. We know a
respected experts on how to test products on
lot of our customers buy our materials for the
hair, and our personal-care customers rec-
aesthetic properties—the feel, or “hand,” as it’s
ognize and respect these experts’ work.
called, the silky touch, the visual appearance. But we realized that there’s a whole element in how
McKinsey on Chemicals: How much time do
customers make buying decisions that we did not
you as CEO spend on innovation?
fully understand. When silicone ends up in a piece of furniture or cookware, we don’t know who
Stephanie Burns: As CEO, I would say around
these people are who are selecting the product.
15 percent on a pure innovation basis, but
When a maker of handheld electronic devices looks
innovation is part of everything we do, so it is
at silicones, they are looking for the customer
difficult to estimate. I do have a very full
experience as well as the electronic-circuitry per-
understanding of the innovation portfolio, which
formance, which we always focused on. So we
is on all our major executive-meeting agendas.
brought in an industrial-design engineer who thinks completely differently from a chemist or
McKinsey on Chemicals: What does it mean to
physicist, and this brings a totally different
have a scientist as CEO?
dynamic to the team’s interactions.
Stephanie Burns: When I am out with R&D
McKinsey on Chemicals: Is being just in silicon
folks and teams that are bringing projects
chemistry a limitation?
forward, there’s probably an ease of discussion
Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank
and a connectivity that takes place. The last
31
Some of our big successes today had their
time I was with our compound semiconductor
genesis back in the late 1990s. In tough economic
research team, for instance, I understood
times, you’re looking to squeeze anything
exactly what they were doing and the progress
you can, and innovation is not immune to that, but
they have made in advancing silicon carbide
there’s a level of research expenditure that must
wafer-production technology.
be maintained—it’s not discretionary expenditure.
It’s required.
Most important, I think I probably have, compared with a nonscientist, a better understanding that this innovation stuff takes time to come to fruition, and that you’ve got to keep these investments consistent and you cannot flip-flop.
Bob Frei (Bob_Frei@McKinsey.com) is a director in McKinsey’s Chicago office, and Chris Musso
(Chris_Musso@McKinsey.com) is an expert principal in the Cleveland office.
32
Capturing the lean energy opportunity in chemical manufacturing High energy prices and climate-change concerns are driving new interest in energy efficiency. Companies can adapt their lean tools and approaches to capture significant energy savings.
Frank Plasschaert,
Ken Somers, and Gautam Swaroop
Between 1990 and 2009, chemical companies
the industry over the past decade. European
were among the many industrial and man-
chemical companies, for example, have
ufacturing companies that boosted corporate
seen energy costs increase from 5 percent of total
performance by adopting lean production
costs in 2002 to about 12 percent in 2009,
methods to optimize material and labor pro1
The study, conducted from
2005 to 2008 by McKinsey and the London School of
Economics, looked closely at how well manufacturing companies adopted proven best practices, such as lean, and at the relationship between these efforts and financial results. An early view on the research, published in 2006, is described in “The link between management and productivity,” by Stephen J. Dorgan,
John J. Dowdy, and Thomas
M. Rippin, available at www.mckinseyquarterly.com. driven primarily by rising oil prices, which have
ductivity. Indeed, a multiyear study of how
remained relatively high despite the
well thousands of manufacturing companies in
economic slowdown.
North America, Europe, and Asia adopted
Most companies have taken steps to lower their
management best practices (including lean) highlighted just how important these practices are to a company’s economic success (Exhibit
1).1
energy intensity (the amount of energy consumed per unit produced). The return on efforts to optimize energy usage was gen-
However, most chemical companies that have
erally three times greater in 2009 than in the
adopted lean techniques have not incorporated,
1990s, and one major focus has been large
or have only partly incorporated, lean techniques
capital-investment projects to capture energy
for increasing energy efficiency, even though
savings, such as combined heat and power
energy costs have reemerged as a major issue for
(CHP) plants. Energy-efficiency initiatives also
33
enable companies to cut carbon dioxide emissions,
efforts first to holistically map out energy
thus providing companies with the means
consumption at each step in their operating
both to do the right thing and to save money.
processes or to identify specific energy waste in their production systems, and then to
Traditional lean programs typically identify
use lean techniques to focus on opportunities
savings that can be gained by improving every
to reduce waste.
aspect of a manufacturing step, and this can include energy savings. But in our experience,
We have found that most chemical companies can
traditional lean programs enable companies
substantially improve the overall energy effi-
to realize only about one-sixth of their potential
McKinsey on Chemicals 2010 energy energy efficiencyrest on the table.
Lean savings—leaving the
Why? Few1 of 3
Exhibit companies are making systematic
Exhibit 1
ciency of their operations when they apply lean tools and approaches that have been translated and adapted to cover energy use (Exhibit 2).
An analysis of the development of energy productivity over time suggests substantial improvement potential.
Current capabilities Historical productivity improvements New requirements to increase energy productivity • Optimizing
Factor input per unit of value added, indexed
• Including
lead and cycle times and preventing waste • Managing organization using key performance indicators (KPIs) for quality and lead and cycle times • Training and leading employees in shortening lead and cycle times and improving quality 350
Labor productivity 300
250
200
Material productivity 150
Energy productivity energy efficiency in optimization levers
• Making energy consumption transparent
• Making waste detection systematic • Developing methods to reduce waste
• Incorporating energy
KPIs in management/ governance systems
• Building capabilities for continual energyefficiency improvement
100
50
0
1960
1970
1980
1990
2000
Source: Bundesministerium für Umwelt, Naturschutz, und Reaktorsicherheit (BMU) 2007; McKinsey analysis
34
McKinsey on Chemicals Winter 2011
McKinsey on Chemicals 2010
Lean energy efficiency
Exhibit 2 of 3
Exhibit 2
Incorporating energy efficiency into lean methodology: there are eight kinds of waste for energy.
Kind of waste
Definition
Example
Overproduction
Producing excess energy (input energy that is unused)
Venting excess steam
Waiting
Consuming energy while production is stopped
Keeping stirrers at full speed in reactor while production batch is analyzed
Transportation
Inefficient transportation of energy
Leaks and heat radiation in steam network
Overspecification
Process energy consumption
(deliberately) higher than necessary
Standardized reflux rates in distillation columns for all product specifications
Inventory
Stored goods use/lose energy
Using uninsulated tanks in tank farms where product must be kept heated
Rework/scrap
Insufficient reintegration in upstream process when quality is inadequate
Redrying polymer fines that did not get coagulated in drying process
Motion
(inefficient processes)
Energy-inefficient processes
Excess oxygen in steam boiler
Employee potential/intellect Failure to use people’s potential to identify and prevent energy waste
Employees not involved in developing energy-saving initiatives
Savings vary by sector, but typical savings for
Taking the lean path to improving
chemical companies can be 10 to 20 percent—and
energy efficiency
in some cases, substantially higher. Importantly,
Companies can realize these gains by incor-
all these savings can be achieved with limited
porating energy-efficiency analyses and
investment and payback periods of three
techniques into their existing lean approaches in
years or less. Energy consumption has tradi-
four ways. First, they can focus specifically on
tionally been managed more carefully in
energy consumption and then system-
the chemical industry’s most energy-intensive
atically identify waste as they would in any other
processes, such as steam cracking or ammo-
lean program (Exhibit 3). Translating the lean
nia and chlor-alkali production, where energy is
value-add identification methodology to the energy
a major cost element. Nevertheless, we have
context, the approach here is to map energy
seen savings of up to 5 percent achievable in
consumption at every step of a company’s
such cases—important gains on such large
operating processes. The next step is to calculate
energy volumes.
the thermodynamically minimum energy
Capturing the lean energy opportunity in chemical manufacturing
35
McKinsey on Chemicals 2010
Lean energy efficiency
Exhibit 3 of 3
Exhibit 3
Building the theoretical limit for heat consumption creates clarity on losses while identifying potential key performance indicators.
Description
Heat consumed by plants 1 and 2
100
Transportation
1
Vented steam Incidental
6
Heat exchangers Heat in steam is lost during transportation, ie, through piping
Steam vented because of plant imbalance for flash steam reuse
Heat-exchanger insulation losses
1
Heat content of air entering scrubber
Exhaust gases 13
Radiation and air leaks
5
Radiation and air leaks of dryer shell
Heat consumed by dryer when not running
Availability
1
Performance
8
OEE EE1
Input/output quality Variation in moisture input and output
1
Rework
2
Theoretical limit for plants 1 and 2
1Energy
Difference between actual performance and best performance; no load losses present, as line runs almost 100% variable
62
Heat necessary to reheat recirculated fines in dryers
–38%
efficiency (EE) linked to overall-equipment-efficiency (OEE) levers.
• Modular
approach makes technical limit work for both complex and simple sites
• Offers potential to track progress through update at regular intervals after standardization • Signals key performance indicators to optimize at frontline level
36
McKinsey on Chemicals Winter 2011
required for each process (its “theoretical limit”)
remainder for 90 percent of the time, eliminating
and evaluate actual consumption against this
the need to keep them heated when they were
theoretical limit. This analysis reveals where
not being used.
energy is being wasted and how loss can be avoided, and it also provides a powerful
A second way companies can extend their lean
motivating tool for site personnel to push for
programs to improve energy efficiency is by
new ideas.
optimizing energy integration in heating and
One US surfactant maker, for example, undertook
analysis. A chemical company changed its process
a heat value-add analysis and found that only
to release heat more quickly during polymer-
10 percent of the steam heat inputs were actually
ization, allowing evaporation to start sooner and
cooling operations, moving beyond pinch
thermodynamically required to make its products;
saving energy on the subsequent drying stage.
90 percent were wasted. Once the causes of the
The total savings from both steps amounted to 10
waste were identified, more than 20 measures
percent and brought the production line close to
were planned to address the problem. These
the industry cost benchmark. In another example,
measures would allow the company to capture
a chlor-alkali maker undertook a number of
steam savings worth $600,000 per year, and the
measures to avoid heat loss and to capture waste
investment would be paid back within three
heat via heat exchangers that enabled it to
years. Loss of steam as it was piped around the
raise the temperature of the brine solution so that
plant represented one of the largest sources of
the electrolysis could attain a higher efficiency
waste, and it was addressed by insulating lines,
level. The investment paid for itself in a year and
repairing steam traps, and simply repairing leaks.
lowered energy consumption by 2 percent—a
The measures also included writing a new
significant reduction, given the size of the chlor-
algorithm for the software steering the company’s
alkali producer’s power bill.
heating and cooling control loop, making possible
5 percent savings on total steam consumption.
A third way that companies can use lean ap-
This initiative alone resulted in $75,000 per year
proaches is to identify process-design and equip-
of savings for just two days of the company’s
ment changes that can deliver greater energy
software engineer’s time.
efficiency. As already mentioned, chemical com-
In another example, a chemical producer was able
with substantial capital expenditures to capture
panies have responded to higher energy prices to reduce the energy bill on its storage operation
energy savings. Complementing this, lean
by 50 percent by reorganizing its tank-storage
methodology makes an important contribution
strategy. Previously, it had operated multiple
by helping to identify numerous smaller invest-
storage tanks, all of which had to be kept heated.
ments that can add up to major energy savings.
By changing its storage procedure—following lean thinking on optimizing inventory to minimize
One chemical producer replaced traditional fixed-
waste, here with an energy focus—it consolidated
speed air compressors with high-efficiency
on a limited number of tanks and closed the
variable-speed compressors, which led to savings
Capturing the lean energy opportunity in chemical manufacturing
of up to 40 percent of electricity consumed to
37
$2 million in additional boiler capacity. By
power its compressors—paying back the €200,000
improving consumption planning, it was possible
investment in less than two years. Another
to make sure that demand would not pass the
company installed a blower-dryer combination to
threshold that triggered pressure drops, and so
avoid using compressed air as a dry air source,
the company was able to avoid making the
and it saved €30,000 a year for an investment of
boiler investment. At another site, a company
€50,000. And at another site, a company in-
captured substantial savings when it was able to
stalled a new heat sensor that enabled it to better
get an accurate demand forecast from a third-party
manage its energy output—again having iden-
user it supplied. Previously, the producer had
tified energy waste through the lean approach—
maintained steam production at the ready to meet
and achieved savings of €64,000 per year
unpredictable demand from its third-party user,
for an investment of just €1,000.
but once it knew the demand timetable, it was able to put its boiler in power-saving mode
A fourth area where lean energy approaches can
during downtime.
eliminate waste and capture savings is optimizing the interface between producers—steam-
To ensure that the gains are sustainable, companies
boiler operators, cooling-water-unit operators,
must put into place a performance-management
and power suppliers—and consumers. One
system for energy efficiency that will provide an
chemical plant was reaching its boiler capacity
objective basis for discussion. One company,
and experiencing pressure drops at demand
for instance, spent about $300 million on energy
spikes, and it was therefore getting ready to invest
a year, but it was having difficulties estab-
38
McKinsey on Chemicals Winter 2011
Focusing on theoretical limits stretches the organization’s aspirations for energy savings that can be achieved with the existing asset configuration and product requirements lishing appropriate key performance indicators
will quickly devolve into an analysis of variance
(KPIs) for energy because it had little sense
that leads only to incremental changes. Focusing
of how KPIs would change in response to oper-
instead on theoretically achievable energy
ating decisions. As a result, it did not change
efficiencies and on the identification of specific
its KPIs for two years. Once the company under-
types of losses between actual and theoretical
stood how it should correct for factors that
positions enables a far more fruitful discussion
play a part in energy consumption—such as price
on potential improvement levers. Such a conver-
fluctuations, product mix, and throughput—
sation will generate strong insights into the type
the company was able to install meaningful KPIs.
and size of losses, and it forms a clearly quantified
With these in place, the company was then
basis for relentlessly focusing on loss reduction.
able to make appropriate decisions and raise its energy efficiency.
Set up the right metrics. Frequently, the challenge for low-cost improvement starts with
Lean energy: The priority list
insufficient energy-consumption metering and
for management
energy-generation cost allocation. Improving
Implementing these lean energy-efficiency tools
these enables companies to identify operating
and approaches will require some new manage-
changes that lower energy usage, such as reducing
ment approaches. Senior management at chem-
standby times. Better information about con-
ical companies will need to take several steps:
sumption and cost allocation also helps in developing meaningful KPIs. With a combination of
Focus attention on operational improvements
energy-efficiency planning and employee training,
versus the theoretical limit. In our experience,
low-cost, sustainable savings can be achieved.
the most successful companies have moved their
Relevant metrics would then include a clear cor-
managers from a benchmarking mind-set to
rection for product mix, quality losses, and
one focused instead on opportunities and closing
throughput variation.
gaps to theoretical limits for energy savings.
This stretches the organization’s aspirations for
Set targets for developing ideas. Companies
the energy savings that can be achieved with
must signal the importance of energy-cost
the existing asset configuration and product re-
reduction to employees and communicate this
quirements. Given the product mix and site
opportunity in the existing language of lean,
specificity of energy production, transport, and
and they should set targets to develop break-
consumption, the benchmarking discussion
through energy-efficiency ideas. For instance,
Capturing the lean energy opportunity in chemical manufacturing
39
they should emphasize the importance of
Put teams of experts in place. Many of the
ideas that involve little or no capital expenditure
leading players in energy efficiency have invested
and that are generated through frontline
in developing coaches trained in the discovery
engagement with plant workers, cross-functional
of energy waste, which is often invisible and tends
problem solving, and changes in mind-sets
to be spread across an entire plant. Identifying
and behaviors. In addition, senior managers should
that waste requires specific technical knowledge,
arm themselves with examples of what can be
for example, steam production network
achieved—borrowing ideas from industry peers
economics or pinch analysis. In addition to
if necessary.
technical knowledge, coaches must possess the ability to tap into frontline knowledge in order to identify solutions and mobilize personnel to capture savings in a manner similar to typical lean programs.
Frank Plasschaert (Frank_Plasschaert@McKinsey.com) is a principal in McKinsey’s Antwerp office, where
Ken Somers (Ken_Somers@McKinsey.com) is a consultant. Gautam Swaroop (Gautam_Swaroop@McKinsey.com) is an associate principal in the Delhi office.
40
Improving pricing and sales execution in chemicals
Some chemical companies have blind spots when it comes to steering sales—and they pay a high price in lost margins and growth. A sales-management approach built around a more granular level of insights makes it possible to improve sales execution and boost returns.
Joel Claret,
Dieter Kiewell,
Soenke Lehmitz, and Prashant Vaze
It is well recognized that improving companies’
four main hurdles. First, although it is well
pricing and sales execution can have a significant
established that sales profitability rather than
impact on profitability. Our data, covering more
sales volume is key to a company’s performance,
than 1,000 commercial performance-improvement
some chemical companies still do not have
initiatives in a range of industries, show that
a clear understanding of the profitability of
when they are successful, such initiatives typically
geographical regions, product lines, and in-
translate into an improvement in return on
dividual customers or transactions, which can
sales (ROS) of between 2 and 7 percent and lead
guide pricing and sales decisions. This is not
to additional sales growth as well. In the chemical
for lack of data: most companies have copious
industry, successful pricing and sales-execution
sales information available through their
initiatives have mirrored these results in a variety
enterprise-resource-planning (ERP) systems.
of portfolios that encompass both specialty
But many companies are not able to orga-
chemicals and commodities.
nize or interpret the data appropriately to provide transparency on profitability, and so their
What is specific to chemicals? Initiatives to im-
sales representatives lack the right data to guide
prove pricing and sales execution must overcome
them when they are agreeing on sales contracts.
41
Next, the chemical industry’s asset intensity
individual salespeople with only simple metrics,
encourages plants to be run flat out, generating
which limits their ability to steer their sales
production surpluses, and companies fre-
force’s actions in the most effective way and
quently suffer “leakage” from their official pricing
improve performance.
structure, as production surpluses must be placed. If sales representatives are given incen-
Boosting sales and pricing performance
tives based on volume or revenue, they are
based on detailed and real-time market
likely to award ad hoc discounts and make other
and customer insights
accommodations, such as offering free services,
These hurdles represent substantial and inter-
to win sales. Sales management, meanwhile, has
connected challenges that hold back many
difficulty precisely assessing the impact this
chemical companies’ ROS performance. We
has on margins and enforcing behavior that will
have found that the four-step approach described
maintain profitability.
below can help companies tackle them and improve performance.
Third, the chemical sector has had to confront extreme volatility in raw-materials prices in
Chemical companies that have adopted this ap-
the past several years, creating serious challenges
proach have achieved substantial improvements
for products that are sold on longer-term con-
in ROS, with the degree of improvement depend-
tract periods than the company’s raw-materials
ing on their starting point and on the type of
purchase contracts. Many companies do not
business they are in. Companies mainly selling
have a clear understanding of which selling prices
commodities in the spot market have seen ROS
should rise and by how much—or, importantly,
improvements of 2 to 4 percent, while companies
how quickly—to pass along the cost increases and
that sell primarily through individual customer
maintain profitability. Lacking this information,
negotiations have captured improvements of 3 to
companies may find it difficult to provide appro-
6 percentage points of margin; companies that
priate and timely guidance to their sales forces on
sell customized products and solutions have
the price levels needed to maintain profitability.
achieved ROS improvements of between 5 and 8 percentage points of margin. In some very
Finally, some chemical companies have a sales-
selective special-product and service cases, ROS
force skills gap. Their salespeople are good
improvements of as much as 20 percentage points
at the traditional job of placing volume that keeps
of margin have been captured, but this requires
their production plants loaded, but many sales
a granular approach that allows players to identify
people have limited abilities to analyze sales data
niche products and services where they have a
and limited negotiating skills to act on what
true competitive advantage and where they can
the data show. This imposes a serious handicap on
implement value-pricing approaches to capture
companies that want to move beyond simply
the full potential value of their offering. These ROS
recouping their costs to capturing pricing that re-
improvements have typically been achieved
flects the distinctiveness of their product and
within two years—and in some cases as quickly as
its value to different customer segments. At the
within nine months.
same time, some companies are monitoring
42
McKinsey on Chemicals Winter 2011
1. Discovering the sales portfolio’s true profitability
Factors that should be examined include the more
The first step that enables chemical companies
obvious, such as sales prices, and the less
to make improvements in pricing and sales
apparent, such as “cost to serve”—in other words,
execution is to establish full transparency into
companies should make a full assessment of
the factors that drive the profitability and
all the costs associated with supplying a customer.
growth of geographic regions, product lines, and
Many of these costs are not immediately visible.
individual customers and transactions. The
It is important to identify customer behaviors
analyses that must be carried out include the pro-
that impose additional costs but that are not
fitability of customers by volume and segment,
captured in ERP-based information. For example,
price performance and profitability across micro-
a customer might make last-minute changes
markets, and on Chemicals 2010
McKinsey changes over time with regard
to an order that result in the chemical company
to margin, volume, and churn by customers and
Periscope
Exhibit
incurring additional but hidden handling and
segments 1 of 1
Exhibit (exhibit).
logistical costs. Similarly, some customers make
Achieving transparency into the drivers of profitability opens the way for performance improvements.
€ per kilogram
Contribution margin per unit, Q3 2009—Q4 2009
12.44
61.60
Average margin in Q3
0.18
61.78
0
Lost
ConVolume
business tinued effect business in Q3, average margin
Source: McKinsey Periscope Platform
–1.25
0
–1.21
Portfolio- Pricing mix effect up
–0.10 –10.43
61.23
Pricing down Exchangerate impact 0.71
Effects of Increase ConNew disin tinued business counting variable business acquired costs in Q4, average margin
61.94
Average margin for Q4 overall Improving pricing and sales execution in chemicals
extensive use of companies’ laboratory ser-
43
that reflects the cost to serve, customer price sen-
vices and technical support, but these additional
sitivity, and its competitive positioning. New
costs are often not reflected in the prices
pricing guidelines, as well as go-to-market and
charged to them.
service-level guidelines, should also be established to reflect these profitability targets.
It is also important for senior sales management to enforce a standardized approach to measuring
Companies can also use guidelines to steer
account profitability across geographies. Fre-
the sales force to capture premium pricing on
quently, different national sales organizations
products if it is merited. For example, one
apply different metrics. These national differ-
specialty-chemical company had a product with
ences make it difficult to effectively manage
distinctive characteristics that provided benefits
performance across regional or global markets.
in certain end-use markets that the company knew gave it the opportunity to charge a higher
Building on this, companies can conduct further
premium in those markets than in others. The
analyses on price performance and profitability
company created guidelines for the sales force to
for individual customers compared with the
capture that premium on the product in the
total portfolio, examine price leakages from gross
particular application, backed up by differentiated
price to net price and then to contribution mar-
branding of the product. It also started to
gin, and look at cost to serve and leakage for
educate its salespeople about where to look for
different customers. These analyses provide a
this type of value-pricing opportunity.
wealth of insights on the true levels of profitability of the company’s businesses, and they
When setting such guidelines, we have observed
can inform targeted pricing actions to capture
that one effective approach is for companies to
the profitability improvement potential.
simulate the impact of their price-setting actions.
This allows the company to model changes
2. Pricing to maximize value capture on
in raw-materials and other costs and then enter
each transaction
prices for a region, country, customer group,
Once the company has gained insights into pro-
or product line. In this way, it can see the impact
fitability, it can start to address its sales per-
on ROS coming from each change. A company
formance, and here pricing is a top priority. The
that produces surfactants, which found that its
first area on which to focus is setting pricing
ethylene oxide costs were increasing, was able
guidelines. These guidelines are created by de-
to model how much it would need to increase
vising action plans for certain customer or pro-
prices to maintain its margins and then set
duct groups; such action plans include deciding
pricing guidelines accordingly for its sales force.
on target profitability levels and price points.
3. Steering the sales force to get the best
For example, if a company identifies that pro-
possible deal
fitability at its small customers is too low because
The third step focuses on sales execution. This is
of the additional complexity entailed in appro-
an area where some chemical companies need to
priately serving this segment, it should reset its
improve, particularly when preparing their sales
profitability targets for the segment in a way
representatives for negotiations with customers.
44
McKinsey on Chemicals Winter 2011
We have observed that while chemicals sales
focus on, for example, directing a salesperson to
representatives are good at the traditional skill of
push volume sales in an area where price
securing sales volumes, many cannot negotiate
increases have been going through easily.
confidently with their customers’ procurement departments to secure price increases. Many reps
4. Establishing an integrated performance-
also lack the analytical skills to deal with sales
management system across the sales process,
data. Given that chemical companies are selling to
from the CEO to the salesperson in the field
many industries that have taken steps in recent
Many chemical companies steer their sales efforts
years to strengthen their procurement depart-
based on volume and on a superficial view of
ments, this puts chemical suppliers at a dis-
the contribution margins that they earn, but this
advantage. Sales representatives must be trained
represents a relatively crude instrument for
to look for ways that they can work with col-
steering the sales organization. Once the steps
leagues in their operations, freight, and finance
outlined above have been taken, best-practice
departments to fine-tune the offering that can be
companies put in place performance-management
provided to the customer, closing leakages and
systems that establish consistent key performance
tying up loose ends to improve service.
indicators (KPIs) for all their commercial activities.
Such systems go into a high level of detail,
An effective approach used by some best-practice
and the results are then consolidated into a single
companies is to provide the sales force with a
reporting system. While companies often have
tool for quoting prices in real time, which arms
different KPIs covered in different reports, an
the salesperson to get the best possible deal
integrated system makes it possible to track
from the customer. The tool’s algorithm incor-
everything in one consistent way. Management
porates pricing guidelines and supports the
can monitor overall pricing performance and
salesperson in finding the deal terms that capture
individual customers’ performance against tar-
the maximum value based on the supplier’s
gets, identifying the best- and worst-performing
distinctive position; it also includes the surcharges
accounts and products—the information is all at
needed to cover specific delivery and product-
their fingertips in one system.
quality requirements for the customer. Additionally, the tool gives the salesperson infor-
This kind of performance-management system
mation—for example, on different price, volume,
also transforms sales-force mind-sets. Tradi-
and delivery-term packages, and on margin—to
tionally, performance dialogues with sales-
be able to propose deal alternatives. All of this
people have focused on activities and volumes.
puts the salesperson in a position to negotiate
With the new system, KPIs are aligned with the
confidently with procurement departments.
goals of the sales organization and the sales staff, and it becomes possible, for example, to
At the same time, sales management can use the
monitor whether a salesperson captured the
tool to monitor sales reps in the field and maintain
target price set for an account. This more compre-
an ongoing dialogue on sales performance,
hensive system with new KPIs can provide regu-
reinforcing its intended messages. The historical
lar feedback to support more effective
data that the tool collects can also show sales
performance dialogues with the sales team—
management which customers and salespeople to
discussions that are focused on issue resolution.
Improving pricing and sales execution in chemicals
45
Beyond performance dialogues, the management
Our experience has shown that when applying
system provides a generally more effective way for
this four-step approach, the greatest benefit to
the company to steer the efforts of its sales force.
senior sales management comes from the analysis
Moving to higher ROS performance:
the highest impact on ROS performance. We have
of a limited number of key indicators that have
Success stories
developed Periscope, a platform that provides
Once these four steps have been taken, we have
tools and this type of focused information to
observed that companies are able to make
support pricing and sales execution. Additional
substantial improvements in ROS performance.
information is available at https://solutions.
Consider the initiatives taken by two chemical
mckinsey.com/catalog/periscope.html and from
companies. The first, a diversified global chemical
the authors.
company with a 500-person sales force, had been contending with declining ROS performance
Companies should also look at the potential that
for several years. This could be partly attributed
can be achieved by integrating this pricing and
to increasing competition from new suppliers in
sales-execution approach with a broader set
low-cost countries, but business segments not
of improvement initiatives that cover all the
affected by such competition were also in decline.
important dimensions of the commercial process.
The company embraced the approaches outlined
These initiatives include attending to organiza-
and applied them to its commercial operations;
tional setup and pricing processes, as well as
within 24 months, each of its business units
looking at how the company works across its
experienced improvements in ROS of 2 to 5
different functions to resolve pricing and margin-
percentage points.
management issues. The initiatives also cover capability building for sales management and
In the second case, a European petrochemical
frontline sales staff. This is a multiyear process,
company lacked full transparency on profitability
but it can allow a company to capture significant
levels in certain customer segments and channels.
additional margin independent of the chemical-
The transparency that was achieved using the
industry business cycle, as well as to make
approach we have described showed the company
silo-breaking, cross-functional improvements
that it could earn better returns by selling
that can carry company performance to a
directly rather than through distributors for parts
higher level.
of its business, and demonstrated that it should enforce new price guidelines for selected customer segments. Within six months, ROS had improved by more than 5 percentage points in the targeted segments and channels.
Joel Claret (Joel_Claret@McKinsey.com) is a director in McKinsey’s Geneva office, Dieter Kiewell (Dieter_Kiewell
@McKinsey.com) is a director in the London office, Soenke Lehmitz (Soenke_Lehmitz@McKinsey.com) is a principal in the Berlin office, and Prashant Vaze (Prashant_Vaze@McKinsey.com) is a principal in the Antwerp office.
46
Kick-starting organic growth
Even in a recovering economy, many companies see only limited potential to boost revenues and profits through organic growth. But there is a larger opportunity to capture: by targeting micromarkets and reorganizing the sales force to prioritize growth, companies can achieve growth rates well above the overall market.
Maximilian Coqui,
Manish Goyal,
Jason Grapski, and Soenke Lehmitz
Chemical companies face two challenges when
opportunities that are hidden when a more
seeking to grow organically in seemingly
generalized or average view is taken of the larger
saturated and highly competitive markets. First,
market.1 This is as true for the chemical
many companies have trouble finding oppor-
industry as it is for other industries and markets.
tunities. Second, even if they identify new areas to pursue, they find it difficult to motivate their
Sven Smit, and
Patrick Viguerie, The
Granularity of Growth,
Hoboken: John Wiley &
Sons, 2008, and Baghai,
Smit, and Viguerie,
“The granularity of growth,” McKinsey
Quarterly, May 2007, www.mckinseyquarterly.com. see these potential growth markets and
But while it is not easy to find growth oppor1
See Mehrdad Baghai,
Why do chemical companies frequently fail to
sales forces to break old habits and take initiative.
translate them into new sales? One part of the
tunities in such markets and transform the sales
problem is that some companies do not do
force, companies should not give up.
enough homework on market prospects and are not keeping up-to-date on the shifting
Extensive McKinsey research shows that re-
customer base, notably when selling into
examining markets at a more detailed or granular
fragmented and changing markets. As a result,
level reveals large numbers of micromarkets that
companies lack insights, in any particular
present substantial organic-growth opportunities
geography, into where the fastest-growing and
well in excess of overall market-growth rates—
most profitable customers might be.
47
The second and related part of the problem stems
The approach, Micromarket Management (M3),
from how companies handle their sales forces.
has two main components. First, it adopts a
In the mature markets in which most chemical
granular lens to target micromarkets and pinpoint
companies in developed countries operate,
growth opportunities. Second, it focuses on
salespeople tend to have routine ways of looking
actionable steps at the sales-force level:
at and dealing with their customers. Directives
building strategies to pursue micromarket
from the top to prioritize new market segments
growth, boosting sales-force effectiveness and
often get lost in middle management and
providing incentives for the sales force to
are not transmitted to the sales force, and when
pursue growth, and strengthening underlying
they are, salespeople do not know how to
commercial capabilities.
follow through.
Defining and grouping micromarkets
The result is sales-force-led prioritization
For many senior managers in chemical
of customer development based on the
companies—in particular, those that serve a
ease of winning the customer, rather than an
market sector growing in line with GDP in
approach built on prioritizing customers
which multiple competitors are entrenched—the
based on their potential contribution to profit-
key question is where to find areas of growth.
ability. Making matters worse, many companies
Getting to the right answer can be a major chal-
do not use an incentive system that rewards
lenge for companies with hundreds or thou-
sales staff for seeking new growth accounts.
sands of customers. For companies that have succeeded with this approach, the first step is to
Not surprisingly, senior-management teams at
break the market down into manageable sub-
many chemical companies in developed
groups—or micromarkets—where the prospects
economies view grappling with these challenges
can be reviewed in detail. Such subgroups can be
as offering little growth. They see rallying
based on shared characteristics—notably, scale,
their sales forces once again to fight for gains in
type of industry, or degree of service intensity—or
this familiar territory as unrewarding trench
simply on geography. One specialty-chemical
warfare. Instead, many senior teams prefer to
company, for example, sorted its markets into geo-
focus on the seemingly more exciting prospects in
graphical regions and then grouped customers
M&A and on investments in fast-growing
and potential customers within each region by
emerging economies.
industry type.
However, in the chemical industry—as in a
Once the micromarket segments are defined,
number of other industries—some companies are
these companies evaluate the growth potential of
starting to show impressive results from a new
each micromarket—both with regard to the level
approach that turns these shortcomings around.
of penetration the company has already achieved
In chemicals, companies that operate in highly
and the additional share that it can aspire to
fragmented specialty markets comprising large
capture—and of the market’s underlying growth
numbers of customer niches have been
or lack thereof. This can provide surprises. For
particularly successful using this approach.
example, one chemical and services company with
48
McKinsey on Chemicals Winter 2011
a 20 percent share of the overall market dis-
continent. To avoid becoming bogged down
covered it had share as high as 60 percent in some
in the complexity of handling numerous micro-
markets, while in others, including the fastest-
markets, successful companies combine micro-
growing market, its share was as low as 10 percent.
markets with similar characteristics (including
Companies also assess the competitive dynamics
growth opportunities) into a much reduced
in the micromarket, such as the number of
and manageable number of “peer groups,” and
competitors and whether pricing in the
then define a strategy for each peer group. In
market tends toward value-based practices or is
most chemical sectors, that number is no more
just aggressively cost-based (Exhibit 1).
than 8 to 10 peer groups in each of a company’s main regions.
McKinsey on Chemicals 2010
A typical micromarket-definition exercise
M3 generate dozens of micromarkets—or even can Exhibit if the company considers an entire hundreds1 of 3
Exhibit 1
For example, a company specializing in inputs for the agricultural sector (including crop-
Companies can use internal and external customer data to assess current performance and identify attractive micromarkets.
The attractiveness of growth areas becomes more nuanced when examined at the level of micromarket data
Market penetration
%
Market size
$ million
40
10
20
20
50
40
22
15
5
Competitive-intensity index
100 = bad
Growth
%
7
6
2
A
35
B
3
C
73
2
D
Micromarkets
Source: Disguised client data; McKinsey analysis
22
E
A
36
B
52
28
C
D
Micromarkets
E
Kick-starting organic growth
49
McKinsey on Chemicals 2010
M3
Exhibit 2 of 3
Exhibit 2
Define peer groups and assign strategies for the micromarkets making up each peer group.
Gross margin relative to operating expenditure, $
Micromarket
5.0
Approach
• Set
micromarket productivity goals based on peer-group average
• Reallocate investment to focus on markets with high potential
2. Maintain
4.5
1. Invest to grow
4.0
3.5
3.0
3. Monitor investment 4. Overstaffed
2.5
2.0
1.5
0
5
10
15
Peer-group strategy:
1. Invest
Invest in sales growth
2. Maintain
Improve productivity
3. Monitor investment
Ensure payoff in capturing new business
4. Overstaffed
Reduce expenses to meet average peer-group productivity 20
New-account opportunity, $ million
protection chemicals, fertilizers, and seeds)
micromarkets exercise can be translated into
aggregated its 200 micromarkets in the United
an actionable sales-development plan for the
States to 10 peer groups. These peer groups
company. As will be explained in more detail, the
were built based on the characteristics of the
peer groups can also be used to share best
farms that they were serving. Factors that
practices across the sales force and to compare
were taken into account while building these
different sales representatives’ performance.
peer groups included the size of the farms, the relative density of the farms in a geographic
Building strategies
area (for example, farms in the west were larger
The next step is for the company to develop
and more spaced out than those in the
strategies for its peer groups, which can then
east), and the type of product ordered by each
be tailored for each micromarket. In one
of the farms.
example, a chemical company grouped its 18 micromarkets into four peer groups and out-
This aggregation to a limited number of peer
lined four related strategies, including “invest,”
groups is an essential step in ensuring that the
in which the company sought to capture an
50
McKinsey on Chemicals Winter 2011
outsize share of growth, and “maintain,” in
external resources and tap into information
which the company’s strategy was to hold on to
gathered by the sales force in the field. This keeps
its market share while maximizing operating
the company’s information on growth prospects
efficiencies (Exhibit 2).
fresh—and hopefully ahead of its competitors’ insights. With this enhanced resource in hand,
Developing the strategic plan involves taking
the company made a scan of potential hospital
into account which micromarkets to focus on based
client prospects, analyzing details down to the
on growth potential and defining how to capture
number of beds in every hospital across a
the potential and to meet or exceed market
country market.
growth. This results in a detailed plan that covers sales-force allocation and in-market capabilities,
Adding the sales-force-effectiveness
performance goals related to capturing new
dimension
business and retaining old business, briefings to
The next step is to ensure that the sales force
the sales force on how to approach new types of
is allocated and provided with incentives
clients, pricing, and an implementation program.
in ways that are aligned with the strategies
District managers translate the strategy into
accurate view of the performance and capabilities
developed for the micromarkets. Having an specific tactics for sales reps to use: for instance,
of the sales force enables the company to act
identifying which accounts to pursue and how
effectively on the leads created by the new
much time should be allocated to each. A com-
micromarket data, so that it can match the best
pany’s pricing policy should reflect micro-
salespeople with the best opportunities.
market opportunities, as well as the customer life-cycle stage and purchase histories that
Some best-practice companies monitor how much
predominate in the micromarket. In addition,
time each salesperson has been spending with
marketing strategies should be sufficiently
each account and conduct a “skill/will” assess-
tailored to provide a distinctive product or service
ment of all sales and service reps, including their
suited to the traits of a given micromarket. For
account conversion and retention performance. In
one chemical company, adopting this peer-group
one company, district managers completed
and micromarket-strategy approach resulted in
evaluations to assess each rep’s skill and will for
a tenfold increase in prospects—identified po-
new-business sales. Coupled with prior perform-
tential opportunities—in some micromarkets and
ance data (including new-account growth,
a narrowing down of realistic prospects in
retention rates, and so on), this evaluation was
others (Exhibit 3).
used to identify the role on the sales force that each sales rep should be assigned to. The chemical
A key piece of the strategy is undertaking
company evaluated each of its 3,000 sales and
detailed research on the best prospects in the
service reps worldwide.
prioritized sectors. One specialty-chemical company redeployed some sales-force resources
Companies can then use the new understanding
to create positions for market-prospect re-
of each micromarket’s relative opportunity
searchers. These individuals scan data from
in combination with each rep’s skill set to re-
Kick-starting organic growth
51
McKinsey on Chemicals 2010
M3
Exhibit 3 of 3
Exhibit 3
Companies should develop a comprehensive view of tangible customer opportunities within each micromarket.
Apply a robust process to identify and prioritize opportunities in each micromarket …
… and significantly increase the world of opportunities for reps to pursue
In current client database
Newly identified opportunities
• Investigate
Total identified market any account site that purchases the client's products
• Search more than 50 global and local databases
• Identify more than 5,000 accounts per microdistrict across 65 industries
• Identify exact locations and calculate value per account
Industry
A
0.64
0.02
B
0.62
0.27
0.60
C
Relevant opportunities • Examine
opportunities the client is interested in approaching in the midterm but currently lacks the capabilities to address
Current sales $ million
Target opportunities $ million
0.33
D
0.00
0.00
E
0.27
0.15
F
0.27
0.00
0.20
G
0.02
H
Accessible opportunities 0.14
0.00
J opportunities where the client has the right offering but economics do not justify immediate pursuit (eg, small accounts, low-margin accounts)
0.00
I
• Identify
0.15
0.12
0.03
K
0.11
0.04
L
0.10
0.13
M
N
Total
Target
opportunities
• Target
opportunities that are an immediate priority and will be assigned to specific sales reps
Source: Client financials; external trade publications
0.07
0.02
0.01
0.00
Current sales: 0.67
Opportunities in database: 0.88
Newly identified opportunities: 2.76
52
McKinsey on Chemicals Winter 2011
One company not only doubled its rate of growth over an 18-month period but also reduced costs 5 percent, since it was able to deploy its sales force more efficiently
allocate sales resources. This should result in reps
levels (or “bands”) and calculate average market
skilled at gaining new accounts (“hunters”)
share to understand the point of diminishing
spending their time aligned with the opportunity
returns. These data were then used to set as-
for generating new business, while reps skilled
pirations. For each micromarket, the client made
at maintaining existing business (“farmers”)
an explicit decision on whether it wanted to get
concentrate on those accounts. This approach
the most possible share points from added
improves sales growth and reduces waste of
coverage or only increase coverage where “bang
sales resources. At one company, the analysis
for the buck” was the largest.
showed a top-performing “hunter” was traveling
200 miles and spending 55 percent of his time
Successful companies have also established
in an area where it now appeared that only
improved performance-management systems.
25 percent of the opportunity existed. His work-
These include defining new pricing and
plan was reorganized and his home base was
service guidelines across accounts to ensure that
moved so that he was traveling only 50 miles and
all accounts are held to a minimum level
spending 75 percent of his time in an area where
of profitability. With regard to sales-force per-
75 percent of the opportunity existed.
formance, best-practice companies have
The company also developed customized pricing
the newly identified growth opportunities
created incentives for the sales force to pursue and sales tools that could be adjusted depending
and to look out for new growth opportunities.
on strategy. As a result, new customers in an
They do this by evaluating the sales reps on
“aggressive growth” micromarket received lower
leading indicators, such as how often they call
prices than customers targeted for service
prospective customers and top-performing
renewals in “moderate growth” micromarkets.
“hunter” reps’ increases in sales time, and on lagging indicators, such as new-account
In another example, the agricultural-chemical
generation and sales growth.
company conducted a detailed analysis that plotted market share against sales coverage. This
Again, the peer-group structure can play a valu-
analysis helped the company identify coverage
able role here. Companies can measure per-
Kick-starting organic growth
formance within peer groups of similar micro-
53
reps to accounts in close proximity, as well as
markets, replacing the typical practice of
changing time allocations to focus on more
simply evaluating an individual market’s and
profitable accounts and more sales (rather than
salesperson’s performance against a set of key
service) activities.
performance indicators. This approach makes it easier to spot major performance gaps and to
Impact
validate hypotheses about the effectiveness
Using this approach, one chemical company
of micromarket strategies and changing market
doubled its rate of growth over an 18-month
conditions. In addition, the peer-group perspec-
period while maintaining upward price momen-
tive can be used to share best practices across
tum. It did this primarily by identifying its largest
the sales force and to compare different sales
opportunities and then assigning sales reps to
representatives’ performance.
capture them. The growth rate achieved was three times higher than that of the underlying
Building the supporting organization to
market, which mirrored the region’s GDP growth.
drive and sustain the change
The company also reduced costs by 5 percent,
In the third phase, successful companies build up
since it was able to deploy its sales force more
the commercial capabilities required to execute
efficiently, giving top sales reps more time for
their micromarket strategies. When assigning roles
face-to-face selling instead of servicing accounts.
and responsibilities, we have observed that companies tend to standardize some duties but
Another chemical company turned around a
also allow for a degree of modification across
decade of market-share losses after implementing
micromarkets.
this approach. The client had lost a point or more of market share for 10 successive years and
In addition, the need to build up certain capa-
failed to capitalize on a booming market.
bilities to be able to pursue micromarket
After launching this effort, the client was able to
opportunities is often recognized when pursuing
hold market share steady for the first year;
this approach. Rather than adding overhead
it has increased share by two to three points
to build capabilities, best-practice companies re-
annually for each of the past three years.
allocate resources. One specialty-chemical company shifted staffing allocations from lower-
This approach has had significant impact in
priority sales territories to set up a new sales-
industries beyond chemicals as well. A large
operations group to monitor its progress in each
air-cargo operator was able to double the share of
of its regions (Americas, Europe/Africa/the
wallet from key strategic customers along
Middle East, and Asia-Pacific). It also put in
targeted trade lanes by following this approach.
place a marketing analyst to identify and track
Similarly, a logistics player was able to grow
opportunities across one region and added a
volume and price simultaneously, increasing
second analyst to prepare financial tools for
revenues by 3 percent. In another case, a leading
real-time decision making in each micromarket.
Asian mobile operator whose annual revenue
This included building maps and assigning
growth had declined by 50 percent over two years
54
McKinsey on Chemicals Winter 2011
used the approach and is now on track to realize
The approach outlined in this article makes it
revenue growth of 5 percent.
possible for companies to generate new market insights by combining granular micromarket
To support companies in the initiatives described
data on growth prospects with specific and
above, we have developed a framework and a
actionable steps that the sales force must follow.
number of tools, which are available as the M3
Chemical companies that have adopted the
approach. The M3 offering includes templates that
approach have seen impressive organic-growth
can be used in micromarket analyses, frameworks
improvements. Consider the alternatives: M&A
for aggregating micromarkets into peer groups,
has a high failure rate. Expanding in emerging
and a number of sales-support tools.
markets is expensive and requires extensive new skills, while innovation—though a well-tested route to growth in chemicals—takes time and luck. Given all that, chemical-industry seniormanagement teams should look carefully at organic growth as a route to building their businesses and improving returns to shareholders.
They should also bear in mind that if they are not paying sufficient attention to and defending their core business, they may well lose it to a competitor—one that is willing to invest the time and effort necessary to build it up.
Maximilian Coqui (Maximilian_Coqui@McKinsey.com) is an associate principal in McKinsey’s Munich office,
Manish Goyal (Manish_Goyal@McKinsey.com) is an associate principal in the Dallas office, Jason Grapski (Jason_
Grapski@McKinsey.com) is a principal in the Southern California office, and Soenke Lehmitz (Soenke_Lehmitz@
McKinsey.com) is a principal in the Berlin office.
February 2011
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