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IBM Business Consulting Services

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An IBM Institute for Business Value executive brief

The chemical industry in an on demand worldDoes your future hold volatility or increased value?

The chemical industry in an on demand world IBM Business Consulting Services1

The IBM Institute for Business Value develops fact-based strategic insights for senior

business executives around critical industry-specific and cross-industry issues. This

executive brief is based on an in-depth study created by the IBM Institute for Business

Value. This research is a part of an ongoing commitment by IBM Business Consulting

Services to provide analysis and viewpoints that help companies realize business value.

You may contact the authors or send an e-mail to [email protected] for more information.

The chemical industry in an on demand world IBM Business Consulting Services1

IntroductionChemicals is an explosive industry. But does explosive mean rife with volatility, or rich in potential growth and value? The answer will depend on how well chemical companies prepare themselves to compete as the industry undergoes unprecedented change. Emerging IBM research suggests that though chemical companies have a long way to go to meet the demands of an increasingly challenging market, better financial performance is well within reach with a new approach to the business of chemistry – becoming an on demand business.

A new view for an unstable industry Today, the chemicals industry is experiencing increasing instability. Industry consolidation, regulatory compliance, globalization and global volatility in feed stock prices threaten business us usual. Technological advancements (in both the industry and IT in general), health, safety and privacy issues, as well as an increasingly demanding customer base, add to the volatile mixture of market opportunities, challenges and threats chemical companies face.

The very structure of the chemical industry has begun to reflect a turbulent environment of change. Some companies find that they are chained to an aging asset infrastructure that may not be providing expected returns. Those few that become adept at effective asset acquisition and management will have a distinct advantage over rivals. And since IT is radically changing the way companies compete and achieve success, chemical companies with sufficient IT sophistication will have a better opportunity to distinguish themselves.

Recent initiatives to achieve incremental improvement have had much less impact in the chemical industry. Whether they focused on differentiation, staying attuned to markets, reducing costs, finding new ways to innovate or delivering reliable returns, smaller initiatives have resulted in smaller yields that are effective over increasingly abbreviated time periods. Looking ahead, many firms see increased volatility on the horizon – but very few can view a clear course to increased value.

Successful chemical firms will look much different in the near future than they do today. To continue to deliver value, chemical companies will have to adopt a new approach: integrating all business processes end-to-end to be able to sense and respond dynamically to customer demands, market opportunities and external threats. IBM® calls this holistic approach the on demand business of chemistry.

Contents

1 Introduction

1 A new view of an unstable industry

2 Chain reaction: On demand contributes to increased business value

4 On demand maturity in practice: A glimpse of the future for chemical companies

8 Are you moving toward an on demand future?

9 Conclusion

10 About the authors

10 About IBM Business Consulting Services

The chemical industry in an on demand world IBM Business Consulting Services2 The chemical industry in an on demand world IBM Business Consulting Services3

As part of its multifaceted industry assessment, IBM analyzed the current attri-butes and initiatives of a number of chemical companies worldwide. Among the prominent companies that participated in the executive interview portion of the study, those exhibiting greater on demand maturity tended to have better financial performance. However, study findings implied that the chemicals industry in general is in the beginning stages of on demand maturity – indicating ample opportunity for growth.

Chain reaction: On demand maturity contributes to increased business value What does becoming an on demand business mean? An on demand business connects end-to-end with suppliers, customers and partners, and fuses the best of business and technology to accelerate value creation. IBM has identified common on demand attributes in nearly every industry, including the chemicals and petroleum industry. On demand companies are:

• Focused – Committed to concentrating on core competencies and differentiating tasks and assets, using tightly integrated strategic partners to manage selected non-differentiating activities

• Responsive – Almost intuitive in the ability to sense and respond rapidly to dynamic and unpredictable changes in the market environment and the needs of all constituents

• Variable – Able to adapt cost structures and business processes flexibly in order to reduce risk and to do business at higher levels of productivity, cost control, capital efficiency and financial predictability

• Resilient – Able to respond to changes and threats – be they technological, economic, or political – enabling the business to continue operating with consistent availability, security practices and privacy safeguards.

We used these on demand attributes, applied to the chemicals industry, to construct a 64-point on demand maturity assessment model designed to help chemical companies begin to look at their businesses in a different way. As part of a multipronged study that included the on demand maturity assessment model, industry analysis, expertise and input from key customers, IBM interviewed execu-tives at 11 large chemical companies in the U.S., Europe and Asia to assess their on


demand maturity across seven process areas: strategy, customer management, IT management, innovation, finance, human capital and supply chain management (see Figure 1). Maturity levels were mapped to financial indicators to reveal business impact.

Figure 1. The scope of assessment spanned seven different process areas.

Of the participants we surveyed, those who assessed as more mature tended to perform better financially as well. Companies scoring higher on the focus attribute tended to be more efficient in their use of assets to generate profit. Focused companies are more adept at improving returns to their investors. Companies with higher variable scores reported higher operating income per employee. Variable companies concentrate on core competencies, work more closely with suppliers, partners and customers, operate globally and manage asset lifecycles closely. Companies scoring well on responsiveness have defended their margins more effectively during the current turn of the business cycle. Responsive companies help their customers get into new businesses. They define the need and product –and perform much of the execution. Companies scoring well on resiliency enjoyed higher revenue CAGR. Resilient companies share risk broadly with partners, customers and suppliers.

Impact: Scaling to market opportunity

Source: IBM Institute for Business Value.

Impact: Increasing revenue growth

Impact: Improving risk/return

Impact: Optimizing capital deployment

6. Supply chain 7.

Strategy

1. Customer

management2.

Finance

3. People/HR

4. Technology

management

5. Inventory

PLM

1. Focused 2. Responsive

3. Variable 4. Resilient


On demand maturity in practice: A glimpse of the future for chemical companies Most of the chemical industry is at the very early stages of developing holistic on demand capabilities. Not surprisingly, innovation and R&D – the historical bedrock of the industry – showed the most maturity across all of the companies surveyed. In addition, each company we surveyed had launched or contemplated initiatives indicating an awareness of the value of on demand capability in most areas of the business (see Figure 2). Even though industry leaders are, in general, in the early stages of on demand maturity, an on demand future for these companies is not difficult to envision. The following sections describe a chemical company that has reached full on demand maturity within each of seven functional areas: strategy, customer management, IT management, innovation, finance, human capital and supply chain.

Figure 2. On demand maturity assessment for companies across functional areas.

Strategy A chemical company with a mature on demand strategy executes only those activities which impact customers directly, deliver comparative advantage or are otherwise core to the value proposition. Other activities are shared or outsourced to achieve best-in-class performance. Smaller working capital and lower fixed costs free up capital to invest and, if needed, to smooth out the business cycle.

Information technology management

Finance management

Risk

1

2

3

4

5

Source: IBM Institute for Business Value, 2004.

Human capital management

Supply chain management

Customer management

Innovation/R&D

Average participant scoreBest participant score


An on demand chemical company’s share in existing targeted segments expands. Thanks to dynamic customer insights and market data, the company optimizes channel strategies and consistently enters new markets profitably. A mature company understands the profitability and other key value indicators (including process-based cost to serve) of individual customers of the enterprise and of particular business units. Customers and segments are managed as a portfolio to increase value. Business strategy and technology road maps are integrated with customers, partners and suppliers.

Asset management, a core strategic activity, is holistic, global, and flexible over the lifecycles of each asset and asset category. This activity includes assets within and beyond the enterprise (including other value net players). Asset management is supported by a consolidated, realtime “dashboard” of all asset-related data that is readily available to management.

For a mature on demand chemical company, environmental stewardship will be a central tenet of the brand, strategy and competitive positioning. Realtime monitoring, using new technologies like radio frequency identification (RFID) at all manufacturing locations, can make automated management of environmental situations possible. Potential scenarios could include the monitoring of pipelines, water treatment facilities and water cooling towers.

Customer managementA fully mature on demand chemical company has an enterprisewide pricing strategy that is well integrated with product, R&D, distribution and promotional strat-egies and supports a clear relationship between pricing and customers’ perceived value. With this mature capability in place, the company is able to work to achieve the best match between customer needs and solutions that can be assembled from available components. All customer-facing employees are empowered and have access to the right information and resources – at the right time – to make well-informed decisions.

A mature on demand chemical company proactively anticipates and responds to customers and exceeds customer requirements and expectations at each customer touchpoint. This includes customer interactions that involve external partners or suppliers. The company has a comprehensive view of all customer data virtually any time, anywhere and from any source. In addition, customers may connect with the company any time and anywhere and receive the same quality of service and infor-mation (for example, realtime views of Certificates of Analysis, order status, shipping status, returns, and issue resolution).

Companies scoring high on

strategy were more effective

at driving revenue and cash

into the business.

Companies scoring well on

customer management had

better operating income per

employee, as well as higher

operating margins.


An on demand chemical company has continuous matching capability, dynami-cally balancing supply and demand across the value net. It has the capability to continuously monitor processes, allowing ongoing optimization of inventory and production. An advantage of this approach is the ability to deliver products on a made-to-order basis.

IT managementThe role of technology is pervasive and strategic for an on demand chemical company. IT is used to improve business operations and profits. IT leaders focus on increasing the return on IT investment and capturing value – not on maintenance and managing costs.

IT enables the overall business environment of an on demand chemical company to be resilient to cope with unusual events. IT strategy is fused to business strategy with a coordinated portfolio of initiatives supporting a holistic approach to integration, collaboration and information access to all partners, suppliers, and customers.

An open IT infrastructure facilitates the easy integration of processes and technology with suppliers, partners, and customers. The IT infrastructure is designed to support business execution – and is measured on these results. For instance, online ordering functions are implemented to provide a lower cost channel than direct sales.

InnovationAn on demand chemical company is quick to enter profitable situations – often creating them with new offerings and capabilities. The company helps customers move into new businesses, first defining the need and the product, and then performing much of the execution. Best-in-class internal capabilities – like safety management, environmentalism, assets, and customer and channel management – are offered as services to others. This allows both the chemical company and its customers to focus on their core capabilities.

An on demand chemical company is the preferred solution provider in its value chain. External partners and resources are integrated into enterprise processes with the same speed and ease with which they integrate their own employees.

Sharing knowledge and adding value to processes are emphasized as core components of the business model and strategy. For example, the ability to link client-facing teams quickly and efficiently with the research organization allows faster development of specific products and services that clients need and want.

Companies scoring better with

IT Management experienced

stronger operating income

per employee.

Companies with higher

innovation scores had

higher operating margins,

experienced less volatility and

achieved stronger ROA with

less volatile revenue.


Finance, legal and riskFor an on demand chemical company, return on short-term capital exceeds that of competitors and peers. The company expertly manages global inventory. Earnings goals are met, even when revenue declines. Expense is adjusted to revenue within the same quarter. Finance activity focuses on strategic issues – not transaction processing.

A general manager in an on demand chemical company has realtime, compre-hensive visibility of performance indicators through executive dashboards for all aspects of the business, anywhere in the world. Financial systems are exceptionally rigorous and strong, providing systematic, exception-based insights that speed decision-making capability.

A mature on demand chemical company promotes security throughout the value chain. Due diligence includes exchanging information about possible threats and methods of defense as needed with partners, within the industry and with govern-mental agencies.

Human capital managementA mature on demand chemical company varies the level of resource skills and capacity to match the exact needs of the business, and can acquire, shift and reassign resources within a month or less. Client-facing staff is located in the same geographies as customers, while support staff is centralized and shared globally to optimize costs and delivery.

An on demand chemical company better satisfies both organizational and employee needs. Employees are empowered and provided with incentives for decision-making. HR tasks are easily executed by employees – the right information available at the right time means that employees can accomplish complex HR tasks quickly, with little or no intervention required from HR staff.

Employees are focused on their roles in delivering value, and execute only those activities which impact clients directly, deliver comparative advantage or are core to the value proposition. Seamless collaboration across the value net means that an on demand company can present “one face” to customers.

Stronger on demand finance

scorers had better operating

margin performance, and

somewhat lower revenue volatility.


Supply chain managementIn a mature on demand chemical company, the supply chain organization concentrates on core differentiating activities, outsourcing all other activities to best-in-class specialists. Business and technical architectures support realtime global interoperability. Partnerships with new geographies formerly considered “distant” are standard practice as the company connects seamlessly with best-in-class external partners throughout the world.

An on demand chemical company executes design virtually. This requires fewer capital assets, reducing capital investment and allowing for more flexibility in including external partners. The company takes advantage of every business relationship to fulfill customer needs. Working virtually and therefore as one factory, its extended supply chain and manufacturing operations can vary capacity to build to new requirements. Manufacturing operations are autonomic – diagnosing and solving any problems that arise to reduce the impact on manufacturing. Using techniques like cogeneration of energy, an on demand chemical company reduces energy consumption per unit output much faster than the industry average.

Are you moving toward an on demand future? Many chemical companies have far to go before they reach full on demand maturity. Awareness and understanding of how the business model must change is the first step in creating greater value. How do you know if you are moving toward on demand? The following list of questions encourages executives to examine how mature their company is today, and can help them chart a course to an on demand future.


Is your company an on demand business?

• Do you anticipate and respond to customer issues before customers can?

• Do you have a comprehensive view of customers anytime, anywhere?

• Can you anticipate capacity or supply issues and flex the extended supply chain within 24 hours?

• How well does your extended manufacturing chain work as one virtual factory?

• How much of your IT budget is spent on maintenance, and how much is spent on creating new capabilities?

• How accessible are the results of every experiment you have ever completed? Are they available anytime, anywhere?

• Do you develop products for markets, or solutions for customers?

• Do you monitor emissions and adjust in realtime?

• How safely do your employees work – whether they have been on the floor for years, or just started today?

• Are you able to provide data for audits the day they begin?

• Do you leverage the collective knowledge of all employees, current and past?

• Can you meet earnings goals even when revenue declines – adjusting expense to revenue in the same quarter?

• Does your CEO have instant, realtime visibility into performance indicators for all aspects of the business?

Conclusion The chemical industry is much like the products it markets: unlimited in potential value and promise – but in some undesirable or unpredictable scenarios, extremely volatile. As the future unfolds, chemical companies will face explosive change in the form of rising costs, increasing globalization and customer and regulatory demands. To harness opportunities and defuse market threats, chemical companies will have to take a new, holistic approach to the business model.

On demand business offers chemical companies benefits in nearly every functional area. Our research suggests that even a modicum of on demand maturity – such as initiatives that show awareness and understanding of becoming more focused, variable, responsive and resilient – can contribute to better financial performance.

However, reaching on demand maturity – and achieving the benefits on demand business has to offer – is a journey that requires not only a commitment to change, but a well-designed strategy that encompasses the entire business. An assessment using a validated model, like the one IBM used in its industry survey, can pinpoint areas of opportunity and help set priorities for on demand initiatives – including where and when investments will be most effective.

© Copyright IBM Corporation 2004

IBM Global ServicesRoute 100Somers, NY 10589U.S.A.

Produced in the United States of America07-04All Rights Reserved

IBM, the IBM logo and the On Demand Business logo are registered trademarks of International Business Machines Corporation in the United States, other countries, or both.

Other company, product and service names may be trademarks or service marks of others.

References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates.

G510-3941-00

To explore the ways in which we might assist you in assessing your company’s on demand maturity, please contact us at [email protected]. To browse other resources for business executives, visit our Web site:

ibm.com/bcs

About the authorWilliam Thomas is a Senior Consultant within IBM Business Consulting Services. He advises senior executives in the Industrial Sector on implementing strategic change. William can be contacted at [email protected].

Contributors James Kulbeda, Americas Chemicals Industry Practice Leader, IBM Business Consulting Services

Lute Quintrell, Partner, IBM Business Consulting Services

Andreas Wickli, Managing Consultant, IBM Business Consulting Services

Linda Ban, Industrial Sector Team Leader, IBM Institute for Business Value

About IBM Business Consulting ServicesWith consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world’s largest consulting services organization. IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues, and the ability to design, build and run those solutions in a way that delivers bottom-line

business value.

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