McKinsey on Chemicals
Number 3, Winter 2011
Over the past year, the worldwide chemical industry has seen a rebound that has surpassed its most optimistic expectations. Demand remained strong in the major emerging markets, boosting the growing chemical industries in those countries as well as generating export demand for established chemical production centers in Europe, North America, and Japan. But demand has also proved more resilient in the developed world than had been feared in the darkest days of early 2009. US producers in particular have confounded doomsayers and ridden the shale-gas boom that has brought a low-price ethylene feedstock bonanza.
Nevertheless, the crisis has certainly affected the industry significantly. As our first article shows, it has accelerated shifts in the global industry’s long-term makeup. “Chemicals’ 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 priorities to this new landscape.
Our second article takes another longer-term perspective on the industry, in this case that of the capital markets. Our analysis of the period from 1994 to 2009 shows that the chemical industry has been a strong performer, outpacing most of its major customer industries in recent years. As “A capital-markets perspective on chemical-industry performance” explains, the analysis contradicts one element of conventional wisdom by showing that there is no empirical basis for the commonly held view that capital markets favor less cyclical specialty-chemical companies over commodity or diversified companies. Instead, the data show that capital markets base their valuations overwhelmingly on past operating performance, regardless of company type. We also analyzed the capital-markets performance of a sample of companies through the crisis, an exercise that showed that markets rewarded companies that took rigorous action—again underlining the market’s focus on operating performance.
Proceeding from the general to the particular, our next two articles address themes that are consistently high on the priority list for senior chemical-industry management—innovation and energy. Innovation remains a major area of opportunity for chemical companies, and one of the most successful practitioners of innovation in the chemical industry is Dow Corning, though it is not necessarily among the best recognized as such because the company is privately held. We sat down with Dow Corning CEO Stephanie Burns and Gregg Zank, its chief technology officer, to talk about their approach to both new-product innovation and business model innovation—an area in which Dow Corning’s Xiameter brand has been a trailblazer.
Climate change has dropped down many CEOs’ agendas in the year since the Copenhagen conference, and with it the urgency to reduce energy consumption and in that way reduce carbon dioxide emissions. However, energy prices remain at high levels, and energy savings continue to present an important area that is worthy of focus. In “Capturing the lean energy opportunity in chemical manufacturing,” we describe a new approach to improve energy efficiency based on an adaptation and translation of lean principles to the area of energy consumption.
Our last two articles focus on marketing and sales topics. With the chemical industry in recovery mode and enjoying a volume and margin rebound, marketing and sales is a particular concern for senior management. “Improving pricing and sales execution in chemicals” describes an approach that enables companies to achieve greater transparency on product and account profitability and sales-force actions; companies adopting the approach have improved their return-on-sales performance, in some cases substantially. The second article, “Kick-starting organic growth,” describes how to apply a more granular lens to discovering new market prospects—micromarkets—and explains how chemical companies can then move to capture these opportunities.
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