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2019 Digital Operations study for chemicals

Part two of a major new study of energy companies and their use of technology in operations.

Introduction

Digitization and technological advances in energy, such as renewables and improvements in battery storage, are adding to the energy, utilities, and resources (EU&R) industry’s skill set. These technologies offer considerable opportunities for transformation and are disrupting the EU&R competitive landscape.

For chemicals companies, digitization in particular offers opportunities to reduce costs in various ways, and is also creating new business models that are being pioneered by new entrants from outside the sector. As a result, many chemicals companies are facing a mix of challenges that can no longer be responded to in the traditional way.

As our survey reveals, chemicals companies are turning to digitization faster than their peers in the rest of EU&R, but this is not thoroughgoing enough yet to keep up the pace of other industries. While their initial digitization efforts have been targeted at specific bottom-line generating assets such as supply chain and production, we think chemicals companies need to take a more holistic approach to digitization.

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Three challenges for chemicals companies

The thorniest problem besetting chemicals companies is a by-product of the dynamics of the industry environment in which they operate: commoditization of their portfolios is accelerating, and substitution pressure rises as chemical substances are increasingly scrutinized for their impact on health or environment. In addition, chemicals companies are under increasing pressure from their customers to come up with more and more innovative applications that can, in turn, help those customers respond to the rapidly-changing environment around them.

Speed and profitability

The pace of change in vehicle design – and similar scenarios playing in other industries – is shortening chemical product lifecycles and accelerating the commoditization of these companies’ portfolios as new solutions quickly become the new standard. Inevitably, profit margins are suffering as chemicals companies are forced to offer discounts sooner than they had planned, while spending more than they might want on product upgrades.

Competitive dynamics

A second issue is that these industry dynamics have opened the door for competitors, particularly in developing countries, to chip away at established chemicals companies’ market share. Smaller and more flexible with lower cost structures, these rivals are attracting customers with customizable product lines that often offer more value at lower price points.

Rising standards

And last of all, the chemicals industry is of course dealing with environmental and societal obligations. As customers, regulators and activists raise questions about how well companies are protecting natural resources, addressing climate change and offering good employment opportunities, chemicals companies are often singled out because of the potential for waste and pollution. Ensuring compliance with local rules, high safety standards and voluntary global corporate responsibility guidelines is even more costly for chemicals companies than for many other industries.

How to become a Digital Champion

Given the study results, the question arises what it will take to become a Digital Champion in the industry. We see five areas evolving to set the focus on:

Focus on developing digitally-driven innovative business models/customer facing functions

Focus on developing digitally-driven innovative business models and customer-facing
functions.

Integrate digital features into existing core products and services to offer additional value to customers and differentiate from competitors. Overcome revenue growth caps in the chemicals industry by monetizing PaaS, which offers attractive opportunities to improve competitiveness, develop closer and enduring relationships with customers and exit the trap of commoditization. Continue to cut costs and optimize manufacturing operations with new technologies and extend the digital transformation to lower costs in marketing, sales and customer service.

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Identify/leverage digital applications and technologies

Identify and leverage digital applications and technologies that can develop or
enhance the capabilities needed to gain a competitive advantage and to manage
the business in a leaner, more agile and customer-focused way.

Decide whether to make or buy new capabilities, which capabilities are available internally, and which capabilities need to be developed through partnerships and other arrangements.

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Integrate digital technologies, applications and initiatives

Integrate digital technologies, applications and initiatives into the overall strategic
thrust of the organization.

For technologies and applications already implemented, determine whether they add value to new business models, products and services. If they do, pull them out of their silos and spread them throughout the company to further enhance capabilities and customer offerings. Don’t allow new digital initiatives to be designed and isolated into individual business units without transparency on them and lessons learned being shared.

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Create a broad digital ecosystem

Create a broad digital ecosystem by combining supplier and customer interactions
and information into a single network.

Use this network as the basis of efficiency improvements (both operationally and customer-focused), new product launches, product and service innovation and speedier time to market.

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Align the corporate culture

Align the corporate culture to make it focused on a digital future.

Make sure that innovation is welcomed and encouraged and that failure is acceptable in the service of achieving process and product improvements. Comprehensive HR programs, new learning formats and culture change management workshops should be designed and supported, to arm employees with the skills necessary to innovate.

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While the environment for the chemicals industry is going to continue to be dynamic and difficult for some companies, this is a good time – perhaps the most crucial time – to develop and expand digital capabilities and set off towards digital maturity. New technologies, apps, databanks, systems and programs will be an essential lever for maintaining competitiveness, developing additional revenue streams and transforming the business model.

Indeed, the most important lesson from Strategy&’s study is that once chemical companies identify the capabilities that they need to modernize and innovate their business model, and aim at digitization to develop and enhance these capabilities internally as well as with suppliers and customers, they start to transform data into real value.

To gain more insightful knowledge, download the full report here: 2019 Digital operations study for chemicals

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