Most chemical companies are wrestling with growing commoditization. Reconsidering the commercial operating model can support and protect margins.
FREMONT, CA: Chemical companies are undergoing a progressively harsher environment as the industry's rising segments become increasingly commoditized. Companies have tried hard to decrease operating costs to offset this trend, but they have paid less consideration to market and sales, where costs have risen. Several companies' commercial operating models are ripe for reconsideration that could aid in managing or better margins. Still, this is not a matter that the marketing and sales department can fix. It is a strategic problem where company leadership must intervene, but taking steps in this direction is hard for several enterprises.
Reconsidering commercial models to match market actuality
The new market reality needs an overhaul of models for marketing and sales. Companies that align their commercial business models with the market environment can apprehend considerable payback. We have seen that the proper commercial working model can produce a 2 to 8% EBITDA(earnings before interest, taxes, depreciation, and amortization) development through a combination of commercial levers and reduction of complexity and prices on the supply side in production, supply chain, and procurement.
Conventional offering
Where margins stay substantial and new application development with customers gives a clear value-creation possibility, a "high touch" commercial model will still be a strength. This method works well where customers think the product gives unique, high-value properties and understand that the producer continues to provide technical and product-development support as per the margins these prices produce.
A low-cost backbone with gradated overlie of service that distinguishes by customer segment
A lot of the industry's portfolio has relocated well beyond this point to where outcomes are in the semicommodity category—simply put, they have some commodity features. The most significant indications of potential commoditization are a broad range of producers, especially ones from low-cost countries, reducing technical barriers to switching suppliers (such as reliance on suppliers for technical support), and growing transparency about pricing.
Under this structure, companies create a commercial model that has a low-cost backbone presenting important services and then has the potential of adding service elements that can be granted to customer segments that pay upper prices. Customers are segmented based on their value to the supplier. The least offering gives standardized service, automated as much as possible, to lower costs. Sales are made with standard delivery times, payment terms, lower order sizes, and no product customization. This type of service is then distinguished for higher-value customers—for instance, by providing on-demand personal technical support, product and batch customization, and main-account relationship management by the chemical supplier. Big data and modern analytics will help better understand customers' needs and willingness to pay for services.
Setting up a different commodity business line or unit.
When earlier specialty businesses face such intense competitive pressure that possessing the least-possible cost model turns important for survival, a different commercial model may become essential. The model is made around a different commodity-concentrated business unit. Establishing a separate business unit may be required as several chemical companies have an issue managing a no-frills method alongside higher-touch methods: most companies find that the greater-touch practices bleed into the no-frills model, undermining its cost competitiveness. The different units should be established with a stand-alone organizational structure, often with different production assets aligned with the low-cost model. Experience display that through establishing separate business units, return-on-sales margin improvements of 5 to 10% are possible, connecting productivity benefits from the commercial area and innovation and operations works.
Commoditization, come next lower margins, is set to proceed. Companies that have wavered to move should now take appropriate steps, including using new digital capabilities to deliver tailored customer experiences with improved cost profiles. The rewards for making these bold moves can be substantial. Accepting the proper commercial operating model and associated cost and complexity lowering on the supply side can yield a 2-8% EBITDA improvement. What we have stated above does not fake to be a thorough look at this important topic. Instead, it intends to help get chemical-company leaders started identifying the right path in their marketing-and-sales strategy.
