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© Oliver Wyman
CRACKING THE ORGANIZATIONAL CODE FOR GROWTH IN THE CHEMICALS INDUSTRY SOCIETE DE CHIMIE INDUSTRIELLE
Annual Meeting - December 18th, 2013, The Yale Club, NYC
Dr. Joachim Krotz, OLIVER WYMAN
Mr. Andrew Hanff, P.Eng., OLIVER WYMAN
1 1 © Oliver Wyman
About Us
Dr. Joachim Krotz
Partner
• Leads the Oliver Wyman Chemical practice
• Former CFO of the German chemical group SKW Trostberg
AG (today part of the BASF Construction Chemicals division)
• Focuses mainly on holistic programs for corporate
development (strategy definition and realization), corporate
performance (operational excellence) and restructuring
• Co-leads the N.A. Organization Transformation practice
• Focuses on strategy definition, organization design,
operations improvement and business unit effectiveness
• Multi sector asset-intensive industrial experience (e.g.
chemicals, plastics, mining, utilities)
• Leads the “organize for growth” initiative within the banking
sector
Andrew Hanff, P.Eng.
Associate Partner
2 2 © Oliver Wyman
Oliver Wyman is a global management consulting firm that combines deep industry expertise with horizontal capabilities
Marsh Inc.
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Re-Insurance Advisors
Mercer
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More than 40 years of experience in consulting
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3 © Oliver Wyman 3
1. Context of the study and our presentation today
2. Summary of outcomes and supporting elements
3. A few takeaways to think about
4. Finding out more
Agenda
Context of the study and our
presentation today
1
5 © Oliver Wyman 5
There are distinct geographic realities within the chemicals space American firms are the ones to watch in 2014, while Europeans are increasingly lagging behind
USA
Catching up
Europe
Lagging behind Asia
At full volume
• Local auto industry demand
positive and a strong factor
supporting the industry
Value migration
will be an ever-
present reality in
the industry
• Core of the
industry has
shifted to Asia
• Almost 50% of
global sales
• Average 3%
growth
predicted
• High costs and
eroding margins
• With the home-field
advantage , Asian
players positioned to
own 2/3 by 2030
• Driven by pulp
production,
automotive, and
construction
• Insufficient ability to
invest in new facilities
and production
• Result will be that
they lag behind in the
long run
• Shale gas boom is also a growth driver, with
recoverable US reserves estimated at 20 trillion cubic
meters and a cost 3x inferior to world average.
• Strong demand will increase price and margin levels, but market
is not without risk, given potential for over-capacity resulting from
large investments in basic chemicals during last five years
• Credit quality expected to stay healthy, supported by recovery
6 © Oliver Wyman 6
Firms must be able to
satisfy shifting
demands…
• Migrating from being a product- to a solution- and service-provider
• Implementing customer-oriented processes
• Tailoring customer-interaction models and channels
• Expanding geographical footprint of clients
• Preparing for the future while delivering short-term results
• Risk mitigation
• Shareholder revenue and profit
• Customer satisfaction
• Employee engagement
• Designing alternative organizational models to address new growth opportunities
• Developing a growth-nurturing culture
• Achieving the right power and resource distribution between business lines, regions, and the corporate center
• Putting in place the right organizational and management models in emerging countries
They need to acquire new capabilities… …and ensure the delivery of high performance
Challenges in the chemical industry Three main types of organizational challenges have been identified
7 © Oliver Wyman 7
Individual firm revenue vs. industry average CAGR Growth averages are very differentiated by industry
There are ‘stars’ in any industry that consistently beat their sector’s average
-40%
0%
40%
-4% 0% 4% 8% 12%
S&P 500firms
Food, Beverage & Agriculture
Average CAGR 4.8%
Communications
Average CAGR 9.2%
Industrial
Average CAGR 6.3%
Healthcare
Average CAGR 10.6%
Chemicals and Paper
Average CAGR 6.9%
Utilities
Average CAGR 1.1%
Retail, Apparel & Services
Average CAGR5.9%
Oil & Gas
Average CAGR 9.7%
Banks
Average CAGR -1.8%
Technology
Average CAGR 10.1%
Insurance
Average CAGR 0.7%
Individual firm (y-axis) revenue vs. industry average (x-axis) CAGR
From 2006-12, in %
Source : Bloomberg, Oliver Wyman proprietary analysis
8 © Oliver Wyman 8
AGRIUM INC
AIR LIQUIDE SA
AIRGAS INC
ARKEMA
ASAHI KASEI CORP
AVERY DENNISON CORP
BASF SE BP PLC
BRASKEM SA-PREF A CHEVRON CORP
CLARIANT AG-REG COOKSON GROUP PLC
DOW CHEMICAL CO/THE DU PONT (E.I.) DE NEMOURS
EASTMAN CHEMICAL CO
EXXON MOBIL CORP FORMOSA PLASTICS CORP
INDUSTRIES QATAR
IRPC PCL
JOHNSON MATTHEY PLC
KEMIRA OYJ
LAFARGE SA
MEXICHEM SAB DE CV-*
MITSUBISHI GAS CHEMICAL CO
MONSANTO CO
POTASH CORP OF SASKATCHEWAN
PPG INDUSTRIES INC
RECTICEL
RELIANCE INDUSTRIES LTD
SAUDI BASIC INDUSTRIES CORP
SAUDI IND INVESTMENT GROUP
SCHULMAN (A.) INC
SCOTTS MIRACLE-GRO CO-CL A
SIKA AG-BR
SOLVAY SA
TESSENDERLO CHEMIE
WESTLAKE CHEMICAL CORP
WR GRACE & CO
YARA INTERNATIONAL ASA
-25%
25%
75%
125%
-10% 10% 30% 50%
Should growth or efficiency be pursued within the chemicals space? 73% of firms that beat average EBITDA growth over the long-term did so by pursuing a growth vs. efficiency play
Highly profitable growth
27% of companies
Efficiency play
10% of companies
Falling behind
48% of companies
Less or unprofitable growth
15% of companies
Revenue growth (x-axis) vs. EBITDA growth (y-axis)
In CAGR%, corresponding median as white lines dividing the matrix
Source : Bloomberg, Oliver Wyman proprietary analysis Note: Based on growth results from 2009 to 2011
9 © Oliver Wyman 9
Market capitalization performance is highly correlated to growth… … with companies that show highly profitable growth outperforming the market capitalization performance of their competitors
4.2%
-7.6%
12.1% 11.4%
-10%
0%
10%
20%
Market Capitalization
CAGR in %, 2009-2011
Efficiency play Less or unprofitable
growth
Falling behind Highly profitable
growth
10 © Oliver Wyman 10
Root causes of stalling growth The outline of the external perspective Stall Points by Matthew S. Olson of the Corporate Executive Board
External factors outside management’s control
(13%)
“Pure” strategic factors
(41%)
Hybrid factors
(29%)
“Pure” organizational factors (17%)
• Root causes are fairly evenly distributed between strategic and hybrid / organizational factors
• Organizational deficiencies have the double effect of also inhibiting the firm’s ability to respond
to strategic factors impacting growth or adapt adequately in the face of negative external
environments
• Economic downturn
• National labor inflexibility
• Regulatory actions
• Geopolitical context
• Premium position captivity by competitor(s)
• Premature core abandonment
• Key customer dependencies
• Voluntary growth slow down
• Adjacencies failures
• Innovation management breakdown
• Failed acquisitions and expansions
• Excessive strategic diffusion / conglomerations
• Wrong performance metrics
• Organization design
• Capabilities and skills gaps
• Flawed decision-making structure
• Talent bench shortfall
• Narrow experience base
• Board inaction
• Inflexible financial goals
Root causes of stalling growth
A partial list of elements
11 11 © Oliver Wyman
Some facts regarding the study Based upon a broad dataset, key organizational findings and insights for promoting sustainable growth were uncovered
Methodology
Participants Key areas investigated
• Quantitative aspects
– Compilation and review of companies’ revenue, EBITDA and market capitalization growth over a 6 year time period
– Segmentation of firms into the different performance categories
• Qualitative aspects
– Investigation of companies’ organizational practices at different levels within the corporate structure
– Comparison of observed practices across the different performance levels
– Deduction of focus areas and best practices
• 477 participants from a diverse set of major chemical companies
• 2/3 of respondents at the level of General Manager or above
• Coverage of 20 segments within the chemical industry
• Geographical location from around the globe, with 42% headquartered in
Europe
• Average revenues of 7.7 billion USD in 2011
• Strategic focus
• Organization & processes
• Culture & talent
• Innovation
• Acquisitions
Summary of outcomes and
supporting elements
2
13 13 © Oliver Wyman
Strategic focus The path chosen to achieve growth
Growth paths
In % of total
Main insights
• Higher focus on growth
as the objective
• One third of growth
originates from adjacent
and new businesses
• Partnerships are
leveraged twice as much
as acquisitions
• 70% consider that
significant changes to the
strategy will be required
in the near future
68% 14% 18% 59% 28% 13%
0%
40%
80%
Organic Partnership Acquisition
Other segments (average)
Highly profitable
Industry average
Source : Oliver Wyman- ICIS joint study, August 2013
14 14 © Oliver Wyman
People and
culture
Organization
Processes,
roles +
responsibilities
Perform
management
Supported
technology
I
II
III
IV
V
Point of departure
Achieving customer-centricity through an aligned sales & marketing org The organization to support the transformation towards customer-centricity has to balance five building blocks and five enablers successfully
Customer-
centric
strategy
1 Customer
solution
development
capabilities
2
Customer +
market
intelligence
Value
proposition
Customer solution +
experience design
capabilities
“Solution delivery” via
“can-do-customer interface
capabilities”
4
Operational
delivery
capabilities
Sales and
support-
channel mix
management
Customer
experience
5
Customer-centric go-to-market model Point of arrival
3
• Identify best practices for
customer centricity
• Set objectives for own efforts,
define milestones
• Identify most attractive target
segments
• Design more attractive value
proposition than competitors
• Acquire more attractive
customers
• Grow share of wallet with
existing customers
• Control customer
experience is
delivered as defined
• Continuous
improvement
process
15 15 © Oliver Wyman
Turnover
Material
Other COGS
R&D expenses
Selling expenses
EBITDA
General & admin expenses
100%
48-52%
14-18%
2-3%
7-9%
4-6%
13-15%
Top-down greenfield design – target P&L structure and six building blocks For each of the six building blocks client’s greenfield will have clear targets closely linked with a target P&L with 13-15% EBITDA (coming from 5%)
Profitable customer &
product portfolio 1 • Focus on premium chemicals segment, eliminate low-margin
products and customers
• Serve selected global automotive OEMs, tier 1&2 suppliers
Customer-centric GTM
approach with supporting
sales & marketing 2
• Act as custom solution provider or value chain integrator
• Establish global key accounts with regional support
• Establish centers of excellence for defined functions
Customer-focused
application engineering 3 • Establish dedicated network of resident engineers suppor-
ting OEM along all steps of product process
• Establish joint-labs with OEMs and other partners where
suitable
Lean, agile and scalable
operations footprint 4
• Establish central management system as production and
outsourcing approach
• Disaggregate production steps to enable hub and spoke
approach with scalable capacities
• Manage distribution to OEMs as core competence
• Use group integrated supply-chain for sourcing benefits
Focused identification &
innovation approach 5 • Establish end-customer scouting to provide deep insights
• Focus on quality enhancing and cost per unit reducing
product and process innovations
• Collaborate with dedicated external partners in a R&D
network with centers of excellence
Lean and agile support
functions 6 • Only establish core support functions with management
impact such as Controlling
• Establish shared/ corporate functions for accounting,
treasury, HR, and IT
Target P&L structure Building Block along Value Chain
16 16 © Oliver Wyman
1%
8%
31%
15%
45%
0%25%50%
Other
Channels
Geography
Customer segment
Product services
Back Office
Strategic design of the organization How are foci of the front and back-offices distributed?
Distribution of key activities to back and front office
In %
Main insights
• Sales and marketing tend to
be integrated
• Front offices are mainly
focused on products and
services, as well as customer
segmentation
• Geographic delivery is
handled to a greater degree
in the back-office
• Decentralized purchasing,
centralized logistics and
distribution
• Accountabilities are well-
defined and pushed down
throughout the organization
Source : Oliver Wyman- ICIS joint study, August 2013
2%
5%
11%
24%
58%
0% 25% 50% 75%
Other
Channels
Geography
Customer segment
Product services
Front Office
Product services
Channels
Other
Geography
Customer segment
17 17 © Oliver Wyman
Trader /
transactional
supplier
Lean / reliable
basics
Standard
package
provider
Product /
process
innovator
Customized
solutions
provider
Value chain
integrator
• Numerous
anonymous or
shallow buyer-
supplier
relationships
• Spot market
behaviour/
index price exists
• Trusted buyer-
supplier
relationships
• Supply reliability is
important buying
factor
• Customers see
certain
differentiation
• Customers need
certain breadth of
offering but cannot
pay for complete
customization
• Customers can
configure own
packages
• Customer
interested in
superior
performance
• High spending in
R&D required to
fulfil
market needs
• Customer willing to
partner to develop
solution
• Customers ask for
customization to
fulfil
specific needs
• Customer open to
shift parts of own
value chain
• Substantial
transaction cost
and risk reduction
seen by customer
Greenfield design – target customer interaction model To ensure efficient client interactions, the GTM approach will focus more on being a customized solution provider or a value chain integrator
Time
(months)
Cost
Devlpmt.
(indexed)
0
Aktivität Verantwortlich/Beteiligt März 2001
KW 21 KW 21 KW 21 KW 21 KW 21 KW 21 KW 21 KW 21
Standard Performance Catalog
Each of these require different organizational elements and capabilities to best
deliver on the product, service, pricing, channel and branding requirements
18 18 © Oliver Wyman
• One product /
product line is
produced at one
site to fulfill global
demand
• Little exchange of
goods and
information
• Maximizes
economies of
scale and scope
for each
production
step/process step
• Suitable for
companies with
high depth of
value add
• Allows for
balancing of
capacities
• Demand from all
prime product
facilities within
region steered to
one facility for
production and
assembly
• Provides for
closeness to
markets
• Improves scale
effects
• Suitable for lower
sensitivity to
demand fluctuation
• High closeness to
markets
• Suitable for
market specific
production with
low value-density
or high delivery
standards
Greenfield design – footprint optimization To meet local needs and leverage maximum scalability, very often a hub and spoke approach is suggested
World factory Process chain Network Hub and spoke Local for local
Project example
19 19 © Oliver Wyman
KAM
VW
KAM
DAIM-
LER/
BMW
KAM
FIAT
KAM
RE-
NAULT
/PSA
KAM
FORD/
GM
KAM
JP/KO
Inter-
face
to...
Product
Mgmt.
SCM
Demand
Mgmt.
Sales
Mana-
ger
Sales
Mana-
ger
Sales
Mana-
ger
Admin
Produc-
tion
Cus-
tomer
Service
Credit
Dep.
Sales
Director
Market-
ing
Sales
Mana-
ger
Sales
Mana-
ger
Sales
Mana-
ger
SLA b
y
Segment
Management
Country
Head
KAM
1…n
Com-
ponent
1…n
Inter-
face
to...
Technol.
Mgmt.
SCM
Demand
Mgmt.
Sales
Mana-
ger
Sales
Mana-
ger
Sales
Mana-
ger
Admin
Produc-
tion
Cus-
tomer
Service
Credit
Dep.
Sales
Director
Market-
ing
Sales
Mana-
ger
SLA b
y
Country
Head
Segment
Management
Technol.
Mgmt.
SCM
Demand
Mgmt.
Sales
Mana-
ger
Sales
Mana-
ger
Admin
Produc-
tion
Customer
Service
Credit
Dep.
Sales
Director
Communication /
Technical
Mgmt. GI*
Country
Head
Creating a market-oriented organizational design Market requirements drive the organizational design, with large companies having to develop the capabilities to manage several commercial situations simultaneously
Appropriately managing the global / local balance has significant organizational implications
Global Accounts: centrally managed
and dedicated sales staff
Regional Accounts: mix of centrally
managed and dedicated sales staff,
and locally managed sales force
Local Accounts: managed by
local sales organization
Glo
bal
/ re
gio
na
l L
oca
l
20 20 © Oliver Wyman
Innovation A view on the mechanisms used to foster disruptive innovation
Mechanisms to foster disruptive innovation
In % of total respondents
Main insights
• Open innovation is a
relatively common
practice across all
segments
• There is a low-level of
confidence that in-house
disruptive innovation can
be successful
• Spin-offs are a relatively
important component of
the innovation portfolio
• 24% of the total
innovation portfolio is
expected to produce
results in the current year
56% 61% 28% 11% 44% 28% 28% 17% 0%
25%
50%
75%
Open innovation In-house Funding of externalstartups
Spin-offs
Falling behind
Highly profitable
Industry average
Source : Oliver Wyman- ICIS joint study, August 2013
21 21 © Oliver Wyman
Acquisitions What are the main rationale for acquisitions?
Acquisition rationales
# of selection
Main insights
• Accessing new customer
groups, product
diversification and
building missing
capabilities are the prime
drivers
• Integration problems
resulting from cultural
differences are one of the
key root causes for failure
33 45 44 28 33 28 67 61 44 39 29 22 0
25
50
75
Reaching newcustomergroups
Productdiversification
Filling inmissing
capabilities
Expandingdistribution
network
Acquiring newintellectual
capital
Protectingagainst
competitors
Falling behind
Highly profitable
Source : Oliver Wyman- ICIS joint study, August 2013
22 22 © Oliver Wyman
1. The acquisition of SÜDCHEMIE by CLARIANT has a multiple of 10.5 times 2010 EBITDA
Valuations on the rise – average enterprise value (EV/EBITDA) multiple Transaction multiples are on the rise, with strategic buyers tending to have an advantage over their private equity counterparts as they can achieve more synergies and thus pay a higher price
2011+
10.5 - 12.01
2010
9.5
2009
7.3
2004 2008 (average)
9.1
2011+
7.0 - 8.01
2010
6.1
2009
6.6
2004 2008 (average)
6.8
• Increasing market potential of specialties chemicals attracts global players, as well as financially strong Chinese and Middle East investors
• Synergies/cost savings
• Market leadership
• Enhance entry barriers for smaller, less sophisticated players
Results
Transaction rationale Commodity chemicals
EV/EBITDA Multiple
Specialties chemicals
EV/EBITDA Multiple
23 23 © Oliver Wyman
Approaches to organization transformation Occurrence of major transformation journeys
Time since last major transformation
% of the total
Key observations
• Two third of companies most
recently re-organized less
than 3 years ago
• High performers continuously
adjust their structure and
question their effectiveness
more often than low
performers
• High performers reorganize
to align on new strategies
and increase effectiveness
• Poor performers seem to
have experienced an
enduring need for
transformation due to merger
or divestment consequences
Less than a year ago 34%
Between 1 and 3 years 32%
Between 3 and 5 years 13%
More than 5 years ago 21%
Source : Oliver Wyman- ICIS joint study, August 2013
A few takeaways to think about 3
25 25 © Oliver Wyman
L
L-1
L-2 L-2
L-3 L-3
L-1
L-2 L-2
L-1
L-2 L-2
L-1
L-2 L-2
Organization transformation Possible reasons for failure during the transformation journey
Source : Oliver Wyman
These interrelated risks must be continuously anticipated and intentionally managed
A B C D Weakness in setting clear
and shared objectives for
the transformation
Weakness in defining the
target organization system
Weakness in engaging
stakeholders and
overcoming resistance
Weakness in planning and managing for excellence in execution
Examples
• Unclear objectives, goals and
end state definition
– Inability to associate the
change with clear business
and strategic drivers
• Absence of continuing Board or
CEO commitment and support
• No robust and compelling case
for change demonstrating that
the status quo is not an option
Examples
• “Copy/Paste” emulation of
organizational blueprints from
other entities - one size fits all
syndrome
• Over emphasis on the structure
with inadequate consideration of
capabilities or soft aspects
• Inconsistencies between
governance and decision
making attributes and the
organizational architecture
– Failure to consciously
steer the required
culture, behaviors and
talent development
Examples
• Over estimation of the level of
senior team alignment
• Unclear accountabilities
between business leaders and
the transformation project team
– Insufficient understanding of
new operating models by
middle management and
individual contributors
– Failure to anticipate
and manage responses
and behaviors that
derail progress
Examples
• Design considerations as the
end point of the overall exercise
• Under estimation of the
resources and effort required to
manage the transition
• Lack of change monitoring/early
warning mechanisms indicating
deviations and risks
• Inadequate follow-through
and accountability
surrounding execution
26 © Oliver Wyman 26
A few takeaways when planning the journey for your chemicals organization
Take away Features
1 Do your homework • Start with a long term strategy, communicate it to the organization
and get understanding and buy-in
2 Push down accountabilities • Don’t create global structures for the sake of it
• Be close to your customers
3 Adopt customer interaction models
adapted to your business
• Adjust to market segments and customer requirements
• Different interaction models might exist within the same BU
4 Adapt top down and bottom-up
processes
• Integrate the management vision into day-to-day operations and
take into account local constraints in setting the vision
5 Adjust the footprint to match your
business model
• Don’t build a ‘worldwide’ plant if you need to be close to your
customers and change formulations on request (in this case the
hub and spoke approach might be more successful)
6 Think partnerships • Often prove more efficient than acquisitions and definitely boosts
innovation
Finding out more 4
28 28 © Oliver Wyman
To learn more about the study, specific results and how you can get involved
Jeremie Dufoix Marketing and analysis Oliver Wyman Tel: +1 857 265 9269 [email protected]
Andrew Hanff, P.Eng. Associate Partner Oliver Wyman Tel: +1 514 841 7954 [email protected]
Press Release - Dedicated article ICIS Chemical Business
15 – 28 July 2013
Upcoming global report - Full survey results
- Customized for your company
- Oliver Wyman point of view
A dedicated webpage http://www.oliverwyman.com/6006
Dr. Joachim Krotz Partner Oliver Wyman Tel: +49 89 939 49 462 [email protected]