McKinsey on Chemicals
Number 3,
Winter 2011

4

22

40

Chemicals’ changing competitive landscape

Innovation in chemicals: An interview with Dow Corning’s
Stephanie Burns and
Gregg Zank

Improving pricing and sales execution in chemicals

10

32

46

A capital-markets perspective on chemical-industry performance

Capturing the lean energy opportunity in chemical manufacturing Kick-starting organic growth McKinsey on Chemicals is written

Editorial Board: Florian Budde,

Copyright © 2011 McKinsey & Company.

by consultants in McKinsey’s global

Philip Eykerman, Bob Frei,

All rights reserved.

chemicals practice together

David Hunter, Tomas Koch, John Warner
This publication is not intended to be

with other McKinsey colleagues.
Editor: David Hunter

used as the basis for trading in the shares of any company or for undertaking

This publication offers readers insights into value-creating strategies

Art Direction: Veronica Belsuzarri,

any other complex or significant financial

and how to translate these

Shoili Kanungo

transaction without consulting

strategies into company performance.

Design Direction: Veronica Belsuzarri

appropriate professional advisers.

Design and Layout: Shoili Kanungo
To send comments, request

Editorial Production: Elizabeth

No part of this publication may be

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McKinsey on Chemicals
Number 3, Winter 2011

4

10

22

Chemicals’ changing competitive landscape

A capital-markets perspective on chemical-industry performance

Innovation in chemicals: An interview with Dow Corning’s
Stephanie Burns and
Gregg Zank

High energy prices and the global economy’s eastward shift are creating new chemicalindustry leaders who play by different rules.
Newcomers must build capabilities to sustain their success, while incumbents must sharpen their value propositions.

Long-term analysis shows that capital markets base valuations of chemical companies above all on past operating performance, and that there is little difference over time between the specialty, commodity, and diversified segments.

Dow Corning’s CEO and
CTO talk about successful approaches to newproduct and businessmodel innovation.

32

40

46

Capturing the lean energy opportunity in chemical manufacturing Improving pricing and sales execution in chemicals

Kick-starting organic growth

Companies can adapt lean tools and approaches to improve energy efficiency and capture significant savings in the current environment of high energy prices. Some chemical companies have blind spots when it comes to steering sales— and they pay for it in lost margins and growth.
An approach built around a more granular level of insights makes it possible to improve execution and boost returns. Even in a recovering economy, many companies see only limited potential in organic growth. But by targeting micromarkets and reorganizing the sales force to prioritize growth, companies can achieve growth rates well above the overall market.

2

Introduction
Florian Budde,
Tomas Koch, and John Warner

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
Welcome to the third issue of

priorities to this new landscape.

McKinsey on Chemicals
Our second article takes another longer-term
Over the past year, the worldwide chemical

perspective on the industry, in this case

industry has seen a rebound that has surpassed

that of the capital markets. Our analysis of the

its most optimistic expectations. Demand

period from 1994 to 2009 shows that the

remained strong in the major emerging markets,

chemical industry has been a strong performer,

boosting the growing chemical industries in

outpacing most of its major customer in-

those countries as well as generating export

dustries in recent years. As “A capital-markets

demand for established chemical production

perspective on chemical-industry perfor-

centers in Europe, North America, and Japan.

mance” explains, the analysis contradicts one

But demand has also proved more resilient in

element of conventional wisdom by showing

the developed world than had been feared in

that there is no empirical basis for the commonly

the darkest days of early 2009. US producers in

held view that capital markets favor less cy-

particular have confounded doomsayers and

clical specialty-chemical companies over com-

ridden the shale-gas boom that has brought a

modity or diversified companies. Instead, the data

low-price ethylene feedstock bonanza.

show that capital markets base their valuations

Nevertheless, the crisis has certainly affected the

regardless of company type. We also analyzed

industry significantly. As our first article

the capital-markets performance of a sample of

shows, it has accelerated shifts in the global

companies through the crisis, an exercise that

industry’s long-term makeup. “Chemicals’

showed that markets rewarded companies that

overwhelmingly on past operating performance,

Article title here

3

took rigorous action—again underlining

translation of lean principles to the area of

the market’s focus on operating performance.

energy consumption.

Proceeding from the general to the parti-

Our last two articles focus on marketing and sales

cular, our next two articles address themes that

topics. With the chemical industry in recovery

are consistently high on the priority list for

mode and enjoying a volume and margin rebound,

senior chemical-industry management—innovation

marketing and sales is a particular concern

and energy. Innovation remains a major area

for senior management. “Improving pricing and

of opportunity for chemical companies, and one

sales execution in chemicals” describes

of the most successful practitioners of inno-

an approach that enables companies to achieve

vation in the chemical industry is Dow Corning,

greater transparency on product and account

though it is not necessarily among the

profitability and sales-force actions; companies

best recognized as such because the company is

adopting the approach have improved their

privately held. We sat down with Dow Corning

return-on-sales performance, in some cases sub-

CEO Stephanie Burns and Gregg Zank, its chief

stantially. The second article, “Kick-starting

technology officer, to talk about their approach to

organic growth,” describes how to apply a

both new-product innovation and business-

more granular lens to discovering new market

model innovation—an area in which Dow

prospects—micromarkets—and explains how

Corning’s Xiameter brand has been a trailblazer.

chemical companies can then move to capture these opportunities.

Climate change has dropped down many CEOs’ agendas in the year since the Copenhagen

In this and future issues of McKinsey on Chemicals,

conference, and with it the urgency to reduce

we will bring you the best of our thinking in the

energy consumption and in that way reduce

field. We trust that you will find the publication

carbon dioxide emissions. However, energy prices

thought provoking, and we welcome your feedback

remain at high levels, and energy savings

and suggestions for topics to cover in addition

continue to present an important area that is

to those we are already working on. Please write

worthy of focus. In “Capturing the lean

to us at McKinsey_on_Chemicals@McKinsey.com.

energy opportunity in chemical manufacturing,” we describe a new approach to improve energy efficiency based on an adaptation and

Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice. Tomas Koch
(Tomas_Koch@McKinsey.com) is a director in the Seoul office and leader of the Asia chemicals practice. John Warner
(John_Warner@McKinsey.com) is a director in the Cleveland office and leader of the Americas chemicals practice.

4

Chemicals’ changing competitive landscape
High energy prices and the global economy’s eastward shift are creating new chemical-industry leaders who play by different rules. Newcomers must build capabilities to sustain their success, while incumbents must sharpen their value propositions to compete.

Florian Budde

A major shift in the competitive landscape of the

in a high-oil-price world, and privileged access to

worldwide chemical industry is under way as

the most attractive consumer-growth markets.

new players from oil- and gas-producing countries and the high-growth developing markets of

While newcomers may be better placed than

China and India join the industry’s top ranks in

incumbent chemical companies in Europe, North

sales. The new players focus on resource

America, and Japan, the shift creates challenges

monetization and economic development, in

for both groups. If the newcomers want to

contrast to the classic shareholder value-

establish themselves as industry leaders in the

creating goals that have historically informed the

coming decades and fully realize the industry’s

strategies of top players.

wealth-creating and society-supporting potential, they must evolve rapidly. They should move

Not only are these newcomers playing by different

beyond simply monetizing their cost- and market-

rules, but they are also better placed to ben-

advantaged positions to build capabilities that

efit from two of the key dynamics driving the

will put them on more equal footing with incum-

industry’s future: control of advantaged feedstocks

bents when it comes to management, innovation,

5

and marketing performance. At the same time,

Closely related to this is the third major change—

to assure continuing success in this new

the arrival among the chemical industry’s

landscape, incumbents must reconsider their po-

leadership ranks of companies based in

sition in the industry and adapt their strategies

hydrocarbons-producing countries and in large,

and priorities accordingly. Newcomers and

high-growth developing markets such as

incumbents that can take these steps will be well

China and India. The simpler value propositions

positioned to ride the global chemical industry’s

of the new players are in some ways on a

continuing profitable growth trajectory.

collision course with the value propositions of the traditional players, and the disruptive potential

A changed industry

of this development is only gradually coming

Coming out of the financial crisis and economic

into view.

slowdown of the past two years, the global chemical industry is seeing major changes. The

The industry’s leading incumbents have operated

first relates to energy-price dynamics. The

for the past two decades with similar goals:

chemical industry is confronting unprecedented

striving to increase shareholder value based on

hydrocarbon price volatility. In addition, energy

their technology portfolio and asset base, and

prices are significantly higher than they have been

making opportunistic excursions from traditional

for the past two decades—and they are higher

home markets to tap emerging-market growth.

than they were coming out of previous recessions.

Whether the companies were based in Europe,

While there is little progress on climate-change

North America, Japan, or South Korea has

regulation, which could add carbon tax–related

only added nuance to this common approach.

costs for chemical companies in certain regions, the industry is nevertheless seeing increasingly

In contrast, for governments and their production

pronounced divergences in gas and electric power

subsidiaries from hydrocarbons-rich countries,

prices among regions. Overall, the degrees of

chemical manufacturing represents an opportu-

cost advantage and disadvantage among regions

nity to monetize advantaged feedstock re-

have increased.

sources and build industries that will provide jobs for their rapidly expanding populations—even

Second, the economic downturn has highlighted

if it will have a detrimental effect on industry

the accelerating shift in the growth of global

structure and profitability.

chemical demand from developed economies to the developing world. While demand in

For leading companies based in fast-growing major

Europe and the United States has not returned

emerging markets, chemical production is seen

to pre-crisis levels and seems unlikely to do

as a necessity to provide the products needed for

so until 2012, China’s chemical demand increased

continued economic expansion. Lower labor

by 6.4 percent in 2009 and by over 15 percent

costs in these countries translate into competitive

in 2010. Meanwhile, new petrochemical capacity

capital-investment and operating costs for

in the Middle East continues to expand, while

these companies, many of which are owned by

plant-closure announcements have multiplied in

the state or by families that have close ties to

Europe, Japan, and the United States.

the government. These companies can establish

6

McKinsey on Chemicals Winter 2011

Building a worldwide market presence will require that newcomers take steps to establish international operations and build up the management skills to run those operations successfully production to capture local market growth,

entry has been built on production, taking

and they are little concerned about any resulting

advantage of their lower cost base to establish

global supply-demand imbalances for the

a presence based on price in their export

chemicals in question.

markets. This is a logical approach and a natural entry point. But it tends to result in the

Importantly, both groups of newcomers include

commoditization of the market and a strict focus

many government-backed companies. As a

on the lowest price, and it therefore risks

result, these companies can invest on a scale that

destroying a lot of the value that exists in the

is much greater than even the largest traditional

market for the new entrants as well as for

chemical-industry players.

existing players.

These changes have been building for years, but

There have been numerous examples of compe-

their importance is hard to overstate. In sum-

tition from new low-cost producers that has

mary, incumbents that have ridden growth in

reduced prices well below the level that would

developed and developing markets are now

assure them a foothold in developed markets,

undercut by powerful new rivals with access to

in products as varied as polyethylene terephthalate

cheap feedstocks and the most attractive

and fluorochemicals. Similarly, Chinese specialty-

growth markets.

chemical products are often sold in developed markets in North America and Europe on a

The new competitive dynamics pose important

specification basis through third parties, which

questions for both newcomers and incum-

means that the Chinese producers are cut off

bents about the steps they must take to assure

from customers and have limited insights into

their continued success. For the newcomers,

market dynamics.

the choices are arguably more straightforward than for the incumbents, which have large

As new players build their presence in the

legacy businesses to reposition.

industry, they must develop capabilities to sustain their growth and look more ambitiously at the

Newcomers must develop world-class

kind of profile they want to create. As a first step,

capabilities

they must establish their own R&D and inno-

For new producers—whether based in feedstock-

vation capabilities, which will enable them to offer

rich countries or high-growth emerging-

differentiated products and make them less

market countries with low labor costs—market

dependent on incumbents for technology.

Chemicals’ changing competitive landscape

7

Second, new producers must start to build

overseas locations will be a new challenge for

marketing capabilities that will enable them to

these players’ senior-management teams.

move beyond selling simply on low price and reap the full economic benefits from their products.

Incumbents must reappraise their

They must develop expertise in approaches

opportunities and adapt

such as differentiated marketing, transactional

Established producers in Europe, Japan,

pricing and value pricing, and sales-force

South Korea, and to an extent North America

management. This is a need shared by all new

will have to take steps to adapt to lower

producers, whether they are manufacturing

overall demand-growth rates for chemicals

for export or meeting surging demand in

in their home markets. Clearly, there are

home markets.

segments of the industry in mature, developed markets that continue to enjoy good prospects

Developing these capabilities will help new

and that are relatively safe in the new competitive

producers get better returns from their current

landscape. These divide into two main areas,

product range and avoid leaving money on

upmarket and down-market, where there will be

the table from selling at unnecessarily low prices.

niches that are relatively impregnable.

Doing so will become even more pressing as new producers expand their portfolios to include

The first area is chemical-industry segments

more sophisticated and higher-value-added

in markets that require customer intimacy and a

products, from which they will want to extract

high level of service support. Examples include

maximum value.

flavors-and-fragrances companies that have developed superior customer insights and ex-

Becoming worldwide suppliers will require new

clusive manufacturing know-how to support

producers to establish marketing and sales

customer demands; coating companies that

capabilities in developed markets that are sophis-

manage the painting of automobiles within the

ticated enough to support this type of product.

production line; leather chemicals, where

Many of these products will require a completely

the producer works closely with luxury-goods

different type of sales approach—one that is

makers; and water-treatment and construc-

capable of dealing with product-approval regis-

tion chemicals. In all these cases, customer inti-

trations, gaining intimacy with customers’

macy makes them less vulnerable to inroads

product-development programs, and getting

from low-cost offshore competitors. The second

products specified for these programs.

area is a group of basic chemicals where the low prices mean that importation is not viable;

Third, all of the above moves related to building a

this includes such products as sulfuric acid,

worldwide market presence will require that

hydrogen peroxide, industrial gases, and, to an

newcomers take steps to establish international

extent, caustic soda. These are, and will continue

operations and—most important—build up

to be, regional markets.

the management skills to run those operations successfully. Whether such operations are

Where incumbents must look especially carefully

established through acquisitions or built from

is at the many market segments between

scratch, creating and running subsidiaries in

the two poles. In many of these segments, lower

8

McKinsey on Chemicals Winter 2011

demand growth is likely to translate into the

cover all domestic demand volumes, and for the

consolidation of players in certain sectors

surviving incumbents that can manufacture

and capacity closures. Producers in Europe,

domestically at below the cost of imports, this

North America, Japan, and South Korea

evolution can be positive if it results in a more

have historically been net exporters of chemicals,

clearly structured and disciplined market with

but for many product areas, their export cost

pricing based on import-price parity.

position will become less and less competitive.
They already face cost disadvantages on raw

It is also important to emphasize that across all of

materials and must confront disadvantages on

their businesses, incumbents must work hard

two other scores: incumbents’ domestic plants

for functional excellence with regard to low-cost

are not only in the wrong place to serve emerging

operations and lean and effective marketing

growth markets such as China, but they also

and sales. In the face of the growing competition

tend to be older installations that have intrin-

from newcomers, incumbents cannot afford

sically higher costs than the new world-scale

any slack in their businesses and must make sure

production capacity that is being installed in the

they are top-class operators in all areas.

new growth markets.
Riding the new market-growth waves
Successfully managing the transition to this

Next, incumbent companies must look beyond

lower-growth mode will require that

their home markets and consider how they

incumbents evaluate their product portfolios

can ride the dynamics that are transforming the

and manufacturing footprints. They must

industry—the rise of chemical production in

also decide in which sectors they want to be con-

feedstock-advantaged countries and the shift in

solidators, with an eye to becoming the “last

demand growth to emerging markets. Incum-

man standing,” and in which sectors it would

bents must ask themselves how they can

make more sense for them to be among the

join up with the new players, whether by estab-

companies being consolidated.

lishing a presence in a resource-rich country or by building capacity in China and other high-

Companies must bear in mind that as the industry

growth markets—or by doing both.

landscape shifts, the relative attractiveness of products will change, with some more vulnerable

They must then consider what they can do to

to the trends in the industry than others. They

enhance and maintain their attractiveness as a

must look at their portfolios accordingly. Estab-

partner. Many incumbents operate broad

lished markets are becoming net importers of

portfolios of businesses; these companies must

a growing range of chemicals, as new feedstock-

think about how they can clarify and best

advantaged producers can profitably serve these

articulate the value proposition that they bring

markets. While imports frequently lead to lower

to their potential partners. High on any list

prices and reduced margins in the short term,

will be innovation—creating new technologies

this is not always the case in the long run,

and products—which has always been a route to

particularly if incumbents are willing to shut part

profitable growth in the chemical industry

of their capacity. Imports are rarely able to

and remains an area of strength for incumbent

Chemicals’ changing competitive landscape

9

chemical companies. Companies that have

The global chemical industry has entered a new

technology that is needed by oil-producing coun-

phase in its evolution, as players from oil-

tries to use in their new petrochemical plants

producing countries and high-growth developing

will be best placed in any contest to participate in

markets take their places among the industry’s

joint ventures. And companies with know-

leaders. These new players are focused on resource

how that is much in demand in rapidly growing

monetization and economic development—and job

emerging markets will be of greater interest

creation in particular, in a number of countries—

to those countries’ governments; they are thus

rather than on traditional shareholder value, and

better placed to gain access to such markets.

they thus play by a different set of rules than do the industry’s traditional leaders. As a result, the

Incumbents must also think about how the market

competitive landscape is changing. Incumbents

access that they could provide in their home

must recognize the shift under way and adapt,

market could be valuable to new producers. They

while newcomers should build new capabilities to

should consider the best way to make this

more fully deploy their strengths in the market.

available. One possibility is to act as a joint-venture partner with a new producer in a way that

As the world economy picks up speed after the

would enable the incumbent to gradually ramp

crisis, senior managers are understandably

down its own production.

preoccupied with navigating back to “business as usual.” However, the shifts in the chemical-

Finally, incumbents must recognize the strategic

industry landscape we have described above have

choices that they face. What kind of bar-

arguably been accelerated by the crisis, as the

gaining chips does the company have, and what

major emerging economies have recovered faster

types of chips might it want to develop? Is it

than the developed ones. As a consequence, the

strong enough to stay independent? Should it

window of opportunity for incumbents to engage

consider partnerships or alliances? Does a

with newcomers could close sooner than

focus on the Middle East make more sense than a

they might expect. The number of exceptionally

focus on China? And if a company decides to

resource-advantaged countries is finite, and

focus on China, should it try to ally with a Chinese

major emerging markets such as China may pursue

player or to establish a greater direct presence

a policy of favoring domestic champions. Incum-

in China? Companies must think carefully about

bents should use any momentum gained from

how to play their bargaining chips for maximum

recovery in their traditional businesses to advance

value creation—these chips cannot be used

their positions in the new industry landscape.

multiple times.

Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice.

10

A capital-markets perspective on chemical-industry performance
Long-term analysis shows that capital markets base their valuations of chemical companies above all on past operating performance. It also shows there is no basis for the commonly held belief that investors prefer noncyclical specialty stocks.

Florian Budde,
Geert Gyselinck, and Christoph Schmitz

The long-running debate continues within the

data from 1994 to 2009 for more than 100

chemical industry over which strategies offer the

chemical companies worldwide, accounting for

road to the best shareholder returns. Much

approximately 70 percent of the total global

senior-management time has been taken up de-

chemical-industry market capitalization.1 This

ciding whether to focus on a specialty, com-

has enabled us to review the performance

modity, or diversified portfolio and whether to

of individual companies (with figures adjusted

take the business closer to the customer,

where necessary to make comparisons pos-

move upstream, or many other plays; a number

sible) and the different chemical sectors, as well

of leading chemical players have recently

as the performance of the chemical industry

made M&A moves to bolster their specialty profiles.

relative to other sectors.

But what is the verdict of the capital markets, the

The analyses show that capital markets do

arbiter of value creation, on these questions?

not regard chemical companies’ sector affiliation—

Since capital-markets performance provides the

specialty or commodity—as an indicator for

ultimate test of shareholder value creation, we

superior or inferior performance. What does stand

compiled 16 years of financial and stock-market

out is that capital markets are above all

11

focused on return-on-invested-capital (ROIC)

construction, with electronics the only major

performance and its development over time, and

customer segment to do better. This capital-

they base valuations on this performance rather

markets performance suggests that the chemical

than on expectations of growth—a dimension

industry on aggregate occupies a desirable

where the markets are seeing little differ-

point in the value chains in which it participates,

entiation between companies. Consistent across

which enables it to capture its fair share—or

the period is that capital markets remain

even more than its fair share—of value.

sensitively attuned to individual companies’ performance trajectories. This was demonstrated

This performance should ease the concerns of

dramatically during the crisis when, as the sidebar

chemical-industry management teams that have

on p. 18 shows, companies that took aggressive

been considering moving their companies closer

steps to cope saw their valuations rebound more

to end consumers in the hope of gaining valuation

quickly than those of more passive competitors.

upside in capital markets, since most customer

Capital markets see chemicals as a

value than chemicals. The performance should

industries have been less successful at creating strong performer

also be a consolation to senior-management

The long-term data show that the often-held

teams that have felt on the defensive in the past

perception of the chemical industry as

few decades because of negative public

sluggish and unattractive is largely unjustified.

perceptions of the chemical industry due to its

From a capital-markets perspective, the chem1 
Our analysis covers 100

chemical companies, each with sales of more than $1 billion per year, with an aggregate market capitalization of roughly $900 billion. Based on market capitalization at the end of
March 2010, this accounts for an estimated 70 percent of the total market capitalization for chemicals.
In most of our analysis, we excluded Saudi Basic
Industries Corporation
(SABIC), given that its high market capitalization would have introduced a bias.
We gathered various performance metrics (for example, total return to shareholders, trading multiples, return on capital, cost of capital, and capital efficiency) but hand-adjusted reported numbers to make possible easier peer comparisons, for example, correcting for nonrecurring items, pension adjustments, operating-lease adjustments, and financial activities.

environmental impact. These teams have

icals sector is a strong performer: shareholder

been wondering how to gain favor from investors

returns for chemicals have performed in line

and the public by remaking their businesses as

with global markets over most of the past 16 years,

something other than chemical companies, at

and outperformed the market average since

least in name, as evidenced by the lack of newly

2004. The exception is the period around 2000,

spun-off chemical companies with “chemical” in

when the dot-com bubble inflated technology

their names. Capital markets, in contrast, appear

stocks and the overall market.

to have taken an unsentimental view on these issues; they are quite happy with the performance

The fertilizer sector has performed particularly

of the chemicals sector (Exhibit 1).

strongly on total return to shareholders (TRS) since 2006. While overall chemicals, excluding

Not a growth play as an industry—but a

fertilizer, showed a compound annual growth

solid earner

rate of 5.8 percent per year between 2006 and

Capital markets provide a valuable perspective on

2010, fertilizer achieved 39.1 percent. This has

how the chemical industry should regard

put fertilizer companies among the highest-valued

itself—whether it should still look at itself as a

chemical companies.

growth play or rather as a middle-aged industry that is past its best days. For many chemical-

Not only have chemicals outperformed the market

company top-management teams, it has been

in recent years, they have outperformed many

somewhat painful to adjust to the reality

of their major downstream customer industries,

that since at least the mid-1980s, the chemical

such as automotive, consumer goods, and

industry has been a mature industry—albeit one

12

McKinsey on Chemicals Winter 2011

McKinsey on Chemicals 2010
Capital Markets
Exhibit 1 of 7

Exhibit 1

The chemical industry has outperformed the market and most of its customers in recent years.

Total return to shareholders, $
Indexed, 100 = December 31, 1993

1,000

Oil and gas
Electronics
Chemicals

800

Chemicals (excluding fertilizer)
Global market
Consumer goods
Construction and building

600

Automotive

400

200

0

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update

that is profitable, still growing, and earning its

components of capital-markets valuation, ROIC

cost of capital—and the mantle of “growth

and growth expectations, across all companies

industry” has passed to information technology

in the analysis set. To do this, we calculated the

and other sectors. This has led to much soul-

correlation coefficient between valuation (with

searching, as companies have attempted to find

regard to its enterprise value to invested capital, or

the right balance between taking an innovation

EV/IC, ratio) and operating profitability (ROIC

stance—chemicals’ historic ticket to growth—and

before taxes). This calculation showed that in 2009,

focusing on squeezing cash out of their busi-

the correlation coefficient was at the very high

nesses, an exercise further confused by the key

level of 0.85, suggesting that the market was

enabling role of chemicals in many “hot”

basing the largest portion of the valuation of

sectors such as solar and electronics.

chemical companies on income performance, with only a limited portion of the value attributed to

What do the markets say? To get to an answer, we

variations in expectations for individual company

analyzed the relative size of the two key

growth (Exhibit 2).

A capital-markets perspective on chemical-industry performance

13

Furthermore, our analysis shows that ROIC per-

and diversified. Put another way, it is increasingly

formance became the key determinant of

hard for chemical companies to make a credible

chemical-company valuation in the eyes of capital

argument about growth prospects to shareholders.

markets over the past decade and that capital markets have observed less differentiation in

McKinsey on Chemicals 2010 growth expectations for companies across the
Capital Markets three sectors that the chemical industry is
Exhibit 2 of 7 commonly segregated into: specialty, commodity,

Exhibit 2

That does not mean the markets expect the industry to stagnate: on the contrary, the markets expect companies to maintain at least 4 to 5 percent annual growth in a global market growing

Valuation of chemical companies happens on a ‘show me the money’ basis.
Commodity

Specialty

Other

Average WACC2

Empirical valuation tendency

Diversified

Valuation level
Enterprise value/invested capital (EV/IC)1

Companies linked to agriculture

7.0
6.0
Valuation premium
5.0
4.0

Correlation coefficient: 0.85

3.0
2.0
Valuation discount

1.0
0.0
0

10

20

30

40

50

80

Operating profitability
Return on invested capital before taxes, 2009E, %
1IC including goodwill, 2009E market data as of February 26, 2010; IC = 2008 adjusted for latest quarter (2009)

property, plants, and equipment; 2009 consensus estimate for earnings before interest, taxes, and amortization.
Note: EV = market capitalization + debt + minority interest and preferred shares – total cash and cash equivalents.
2Weighted average cost of capital.
Source: Bloomberg; Datastream; McKinsey chemicals capital-markets perspective, 2010 update

14

McKinsey on Chemicals Winter 2011

overall at 3 percent. The overall capital-markets

In addition, capital markets are attributing growth

view is that the industry is mature and that it

prospects to Taiwanese companies well-placed

is unlikely that many companies will be able to

to serve Chinese demand growth, to chemical

create outstanding growth stories, but markets

companies in the high-growth enzymes sector and

certainly like the shareholder returns it provides.

in research chemicals for the life-sciences industries, and to chemicals and services for the

Rewarding individual growth stories

hospitality industry.

This observation about the growth profile of the chemical industry in aggregate, however,

Thus in the market’s view, the chemicals sector

should not obscure the fact that there are some

does include areas with growth prospects.

growth stories that do impress capital

However, to consistently impress markets, top

markets. The markets have rewarded such com-

management must first make sure that the

panies with valuations that exceed their

company excels in ROIC performance.

performance strictly based on income, which means that value is being attributed to the companies’ growth prospects.

A dynamic sector, where success gets rewarded and weakness is punished
The capital-markets perspective underlines the

As mentioned above, the fertilizer sector has

degree to which the chemical sector is dy-

recently enjoyed peak valuations and, along with

namic. This is shown by the fact that there con-

other chemical companies serving the agri-

tinues to be significant mobility across all the

culture sector, has made up the largest group of

industry’s valuation-performance quartiles—

“growth” chemical companies in the immediate

demonstrating value creation (as well as value

pre-crisis period. The agriculture sector received

destruction) and making clear the high degree of

a certain degree of hype in the late 2000s with

sensitivity with which stock markets are fol-

the general commodities boom, the biofuels fad

lowing the performance of individual companies.

and related government subsidies, and food-

For example, among top-quartile companies

shortage scares. This has resulted in capital-

in 2008, fewer than half were in the quartile a

markets excitement about fertilizer stocks,

decade ago. At the same time, 16 percent of

particularly those in the potash sector. Crop-

top-quartile companies in 2008 had been bottom-

protection-chemicals and seeds companies

quartile companies in 1998, while 25 percent

also rode the same wave of market enthusiasm.

of bottom-quartile companies in 2008 had been

There continues to be significant mobility across all the industry’s valuation-performance quartiles—making clear the high degree of sensitivity with which stock markets are following the performance of individual companies

A capital-markets perspective on chemical-industry performance

15

McKinsey on Chemicals 2010
Capital Markets
Exhibit 4 of 7

Exhibit 3

Capital markets remain highly alert to changes in performance trajectory.
Distribution of valuations in the chemical industry: changes in one decade
Enterprise value/invested capital1 distribution …
Median of quartiles, 2008

… and where it came from2
%, 1998
1st quartile
2nd quartile

16
1st quartile

2.0

2nd quartile

1.2

3rd quartile
4th quartile

3rd quartile

11

41

4th quartile

32

1.0
26

0.8
52

11
11
1

Including goodwill. new entrants.

2 Excluding

Source: McKinsey chemicals capital-markets perspective, 2010 update

in the top quartile in 1998. That mobility reflects

What strategies best drive chemical

the nature of this complex and fragmented

stocks’ performance in capital markets?

industry, where changes in end-user demands and

What guidance does this analysis provide on how

raw-material costs give companies opportu-

strategy correlates with strong performance?

nities to innovate and redefine their products and

Since chemical companies’ strategies are hard to

services in specific markets and geographies.

classify, competing as they do in a range of product and geographic markets, we chose to

Thus, even though capital markets are showing an

examine performance relative to some easily

increasing assumption that growth differentials

measurable dimensions of how a company

between chemical companies are converging, if a

operated—such as scale, product and portfolio

company changes its performance trajectory,

focus, or geography. That analysis let us test

capital markets are perceptive and reflect these

a number of hypotheses about what drives value

changes in valuations. As a result, some

creation, defined as total return to shareholders,

companies move up and some drop down. The

market-to-book valuation, and ROIC. Using data

message from capital markets to senior-

from 1994 to 2009, there are a number of

management teams: do not rest on your laurels—

observations that can be made.

and if you are down, do not despair (Exhibit 3).

16

McKinsey on Chemicals Winter 2011

McKinsey on Chemicals 2010
Capital Markets
Exhibit 5 of 7

Chemical segments perform roughly in line with one another.

Exhibit 4

Cumulative total return to shareholders1
$, indexed: 100 = December 31, 1993
500

Specialty
Diversified
Commodity

400
Compound annual growth rate, %
300

Specialty 8.8
Diversified 8.0

200

Commodity 7.8

100

0

1

1994

1996

1998

2000

2002

2004

2006

2008

2010

Sample excludes Saudi Basic Industries Corporation (SABIC) and fertilizer companies.
Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update

Portfolio. Our analysis shows that all the chemical

To achieve top-tier performance, portfolio seems

segments (specialty, commodity, and diversified)

to play a role—but it is not portfolio in the sense

performed roughly in line with one another from certain segments during certain limited time

Bartels, and Florian Budde,
“Multiple choice for the chemical industry,” www. mckinseyquarterly.com, August 2003, and Thomas
Augat, Eric Bartels, and
Florian Budde, “Structural drivers of value creation in the chemical industry,” in
Value Creation: Strategies for the Chemical Industry,
Weinheim, Germany: WileyVCH Verlag, 2006, pp. 27–39.

nuanced and specific to certain subsectors. It is impossible to make comparisons at the level of

periods. For example, analysis that we undertook
2
See Thomas Augat, Eric

of specialty versus commodity. Instead, it is more

1994 to 2009. Capital markets have favored

companies, as most companies have different

of the 1992 to 2003

period2

showed that

diversified companies performed best, followed by

portfolios, but it is possible to identify the performance of individual businesses.

specialties; commodities performed worst.
However, when we extend the analysis to 2009, it

Our return-on-sales (ROS) analysis of individual

becomes difficult to identify a consistent trend

businesses shows that while some sectors clearly

over time. Put another way, portfolio differences

have higher ROS, the spread of performance by

for specialties, commodities, and diversified

sector participants is quite large. For example,

players have not translated into better or worse

specialty electronic chemicals achieved higher

performance; all segments are in line with one

ROS from 2001 to 2008 than basic electronic

another (Exhibit 4).

chemicals. However, the variations in performance

A capital-markets perspective on chemical-industry performance

17

around the average are substantial, and so

lackluster sector, or, if the company is determined

performance has to be assessed on a company-by-

to switch, make sure it can become a top

company basis (Exhibit 5).

performer in the attractive sector. Presence in an attractive sector is no guarantee of success—

This holds a clear message for senior-management

performance in ROIC.

ensure that it cannot improve performance in the

Exhibit 5

and neither does it provide an excuse for poor

McKinsey on Chemicals 2010 teams. Before rushing to abandon apparently
Capital Markets dowdy sectors and trying to move into supposedly
Exhibit 6 of 7 more attractive sectors, management must first

analysis that we undertook focused on whether

Megatrends. One further portfolio-related

The average profitability of a business segment is no guarantee of success: participants show wide variations in performance.
Performance spread around average

Average return on sales in segment, 2001–08, %

Segment1

–10
Specialty electronic chemicals
Industrial and institutional cleaners
Flavors and fragrances
Catalysts
Cosmetic chemicals
Crop-protection chemicals
Specialty
chemicals

Pigments
Plastic additives
Coatings
Construction chemicals
Specialty polymers
Adhesives and sealants
Advanced composite materials
Water-management chemicals
Active pharmaceutical ingredients
Basic electronic chemicals

Commodity chemicals Bulk polymers
Fertilizers
Basic organics/petrochemicals
Fibers

1Based

on SRI segmentation.

Source: Bloomberg; Reuters; SRI International; McKinsey analysis

0

10

20

30

40

18

McKinsey on Chemicals Winter 2011

Lessons from the crisis:
The market rewards tough actions and rigorous management
We analyzed capital-markets performance

up of two segments: first, companies that

during the financial crisis to understand lessons

were recognized as untouched by the crisis

on how companies should respond to challenges.

(for example, companies making flavors and

We examined the total-return-to-shareholders

fragrances and serving the food industry

(TRS) performance of a representative group of

or high-end luxury-goods sector), and second,

22 chemical companies, from an all-time high on

companies that visibly reacted to the crisis

June 17, 2008, to March 25, 2010.

with cost-cutting and restructuring moves, which set them up to come out of the crisis stronger

When the economic crisis started in autumn

than before. Both these types of companies saw

2008, the initial response from the capital

capital markets move their stock prices up,

markets was to drastically reduce the value of

with top-quartile performers up 72 percent in

the chemical sector as a group, just as it did to

the period.

all other sectors and to the market overall. This phase continued through March 2009, with little

At the other extreme were companies that were

difference between top-quartile performers

hit hard by the crisis, primarily because of the

(TRS was down 48 percent) and bottom-quartile

weakness of their balance sheets going into the

performers (TRS was down 66 percent). But

crisis or because the capital markets recognized

when the capital markets started to get over

their existing strategies would not be successful

the initial panic and recover their senses,

in the “new normal.” Their valuations remained

they revised this initial judgment and showed

depressed, recovering only 28 percent. In the

appreciation for the differences between

middle were companies that did not react

individual chemical companies’ performance

aggressively to the crisis and were waiting for the

and prospects.

storm to pass. Many such companies had robust business models, but by failing to make

This led to a segmentation of chemical

rigorous moves to cut costs and improve

companies during the recovery phase from

operations, they emerged weaker relative to

March 2009 to March 2010 (exhibit). At

companies that seized the opportunity for action

one extreme was a group of companies made

presented by the crisis.

A capital-markets perspective on chemical-industry performance

19

These events provide a clear indication that

While the crisis was a short period of exceptional

McKinsey on do respond to 2010 capital markets Chemicals individual
Capital Markets and actions. Management companies’ situations
Sidebar exhibit decisively and took highly teams that reacted

capital markets: chemical companies should

stress, it confirms the enduring message of the keep their focus on strong ROIC performance.

visible actions were rewarded by the markets.

Exhibit

Patterns that emerged during the crisis show capital markets favored companies that seized cost-cutting opportunities.
Median annualized total return to shareholders: all-time high to turning point1
%
1st quartile

24

• Companies

with rigorous and visible restructuring efforts
(niche) players that were dragged down with the flow and have now recovered

• High-performing

2nd quartile

–1

• Players

weathering the storm with robust business models that continued to operate as usual after the crisis
• Companies with limited or moderate restructuring efforts but lasting exposure to the crisis
• Companies

3rd quartile

4th quartile

–16

–38

• Companies

with tight liquidity and/or refinancing needs growth stocks without a new post-crisis formula; these players have been set back to normal

• Former

1From

all-time high on June 17, 2008, to March 25, 2010; indexed with starting date of June 30, 2008.

Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update

20

McKinsey on Chemicals Winter 2011

capital markets have favored chemical companies

the consistent message from capital markets is

that are linked to and riding global megatrends—

that any strategic move must focus on gener-

trends that are having a broad societal and

ating good ROIC performance. Any move related

economic impact worldwide. Looking at market

to megatrends must also bring strong ROIC

performance since 2005, we found that chemical

performance with it for it to be viewed favorably

companies associated with two megatrends—

by the markets (Exhibit 6).

population growth and the unconstrained demand for limited resources—have outperformed over-

Focus. Focused companies have performed better

all chemicals in capital markets. The first group

in recent years than unfocused companies. We

consists of chemical companies that supply to

define focused companies as those with more than

the agricultural and food industry (including

80 percent of sales in two businesses; unfocused

fertilizer, crop-protection-chemicals, and seeds

companies are those with less than 50 percent of

companies), and the second group comprises

sales in two businesses. The strong performance

companies with privileged access to natural

McKinsey on Chemicals 2010 resources through backward integration. What
Capital Markets chemical-industry senior-management teams

Exhibit 7 of 7 must remember, however, before trying to hitch

of fertilizer companies has helped amplify this trend, but even when fertilizer companies are excluded from the analysis, the superior performance of focused companies stands out.

themselves to one of these megatrends, is that

Exhibit 6

Companies associated with megatrends outperformed the broader market.
Cumulative total return to shareholders
$, indexed: 100 = December 31, 2004
700

Food-driven
Resource access–driven

600

Chemicals overall

500
Compound annual growth rate, %

400

Food-driven 26.2

300

Resource access–driven 14.2

200

Chemicals overall 8.1

100
0
2005

2006

2007

2008

2009

2010

Source: Datastream; McKinsey chemicals capital-markets perspective, 2010 update

A capital-markets perspective on chemical-industry performance

21

Size. For specialty chemicals, size clearly matters:

believed, for example, that investors prefer

larger specialty companies consistently out-

noncyclical specialty stocks to commodities, there

perform smaller ones on TRS. For commodity

is no empirical basis for such a claim. What

companies, larger companies outperformed

does stand out, however, is that capital markets

smaller ones until the crisis, but since then, per-

are taking a conservative view of chemical

formance has converged.

companies’ ability to differentiate themselves with regard to growth and instead are focused on

Region. Asian markets (excluding Japan) have

companies’ ROIC performance and its develop-

done well because of growth in the region;

ment over time. Markets are finely tuned to

economic growth translates into growth in demand

changes in the performance trajectories of indi-

for the chemical industry. Europe has also done

vidual companies, and winners must therefore

well, primarily because the European chemical

remain on top of their game. While capital-markets

index is largely driven by German companies,

performance in the past five years has shown

which have increased their productivity and taken

chemical companies that ride megatrends have

away share from non-German competitors in

excelled, experience has shown that capital-

the eurozone. Japanese companies continue to

markets favorites can quickly change. The message

be weak, and North American companies are

from the capital markets that endures, however,

somewhere in the middle.

is that ROIC performance matters above all.

Our analysis of the 16 years of data shows that capital markets do not regard chemical companies’ sector affiliation—specialty or commodity—as an indicator for superior or inferior performance.
Put another way, although it is commonly

Florian Budde (Florian_Budde@McKinsey.com) is a director in McKinsey’s Frankfurt office, global chair of the chemicals practice, and leader of its Europe, Middle East, and Africa chemicals practice. Geert Gyselinck
(Geert_Gyselinck@McKinsey.com) is an associate principal in the Antwerp office. Christoph Schmitz (Christoph_
Schmitz@McKinsey.com) is a principal in the Frankfurt office.

22

Innovation in chemicals:
An interview with Dow Corning’s Stephanie
Burns and Gregg Zank
Dow Corning’s CEO and CTO talk about successful approaches to new-product and business-model innovation.

Bob Frei and Chris Musso

Dow Corning’s performance in the past decade is

large-scale plant in Zhangjiagang, China

one of the more overlooked success stories

(a joint venture with Wacker Chemie), which will

of the global chemical industry. Privately held by

complement its large-scale plants in the United

Dow Chemical and Corning, Dow Corning

States and the United Kingdom. Similarly, in

is the world’s top silicones producer and, through

polysilicon, Hemlock Semiconductor is building

its majority stake in Hemlock Semiconductor

a new plant in Clarksville, Tennessee, to main-

Group, the leading maker of polycrystalline silicon

tain its capacity and cost lead.

(polysilicon), the raw material for computer chips and solar cells. Dow Corning has historically

What is new is the acceleration of the company’s

seen steady growth, but in the past six years,

sales and earnings trajectory. Part of this

its performance has accelerated dramatically, and

is being driven by strong growth in demand in

innovation has played a key role in this.

developing markets such as China. Dow

Dow Corning has always grown by combining a

it in a strong position to serve this demand, but

Corning’s low-cost manufacturing base puts capability in low-cost bulk silicones with

the company is not simply sitting back while

leadership in silicon-based specialty chemicals.

it rides that wave. Instead, it has made a

It continues to follow this approach, with a new

significant push in innovation to strengthen its

23

growth momentum. It has drastically redesigned

2010; sales hit $4.4 billion and net income was

and reenergized its new-product-development

$615 million, putting it on a trajectory for its

approach, and at the same time has emerged as

best-ever results in 2010.

a chemical-industry leader in businessmodel innovation.

Stephanie Burns, a PhD chemist, has been Dow
Corning’s CEO since 2004 and has led these

In 2002, in the fading days of the dot-com

developments. She and Gregg Zank, the company’s

boom, Dow Corning took a bold gamble when it

chief technology officer and senior vice presi-

launched Xiameter, a new business model

dent, sat down recently at their Midland, Michigan,

comprising an online-managed, low-cost, no-frills

headquarters with McKinsey’s Bob Frei and

sales channel for its commodity silicones,

Chris Musso to discuss their perspectives on suc-

offering competitive pricing to customers willing

cessful innovation in the chemical industry.

to buy in bulk, without research or technical support. Plenty of other chemical companies were

McKinsey on Chemicals: Where does

dabbling in e-commerce, but none embraced a

innovation stand among your priorities?

business model that effectively divided the company’s products into two brands, as in this

Stephanie Burns: Innovation is definitely one of

case, where there was the traditional Dow

the very top priorities for the company. It’s our

Corning on the one hand, offering customers

future—it’s the way we’re going to grow. We divide

specialty silicones backed up by technical support

the very substantial growth we have achieved

and R&D, and Xiameter on the other.

over the past nine years into three categories, and there’s been a major innovation component to

Dow Corning confirmed the success of the new

all of them. The first is momentum growth, which

business model in 2009 when it announced

is directly linked to GDP expansion around the

a fivefold increase in the number of products it

world, and Xiameter has brought us a lot of growth

offers via Xiameter. Meanwhile, sales growth

there. The second is penetrating new geographies

based on new-product innovation has continued

with our technology, and innovation plays an im-

to accelerate.

portant role here because we’ll often do formulations that are specific for the geography or

The financial results bear this out. Dow Corning

employ innovative business models that allow us

saw sales rise from $2.49 billion in 1995 to $3.37

to expand in a particular region. The third

billion in 2004, when it exited from its nine-

category is more traditional, “pure” innovation—

year Chapter 11 bankruptcy protection linked to

new applications and products. All three cate-

breast-implant liabilities, a compound annual

gories have contributed to growth, with the biggest

growth rate of 3 percent. Net income rose from

shares driven by the second and third categories.

$153 million in 1995 to $289 million in 2004.
Its sales then rose 62 percent in the next four years,

McKinsey on Chemicals: How has your

reaching $5.45 billion in 2008, a compound

approach to innovation changed in the

annual growth rate of 13 percent, and its net

past decade?

income increased more than two-and-a-half times to $739 million. After a retreat in 2009,

Stephanie Burns: Ten years ago, our innovation

results rebounded in the first nine months of

approach was mostly the traditional, inside-out

24

McKinsey on Chemicals Winter 2011

materials-innovation approach. But we decided

McKinsey on Chemicals: How did you deal

that this approach was not working well—we

with the challenges and cultural issues within the

really needed to deliver greater returns from our

company when making this change?

strategic R&D investments. Reevaluating our approach to innovation has been part of a complete

Stephanie Burns: I think we have been suc-

rethink of Dow Corning’s business. Dow Corning

cessful in this because we defined a really clear

has always enjoyed respectable growth rates

business model—Xiameter—for our undiffer-

across most of its businesses, and for better or

entiated business. We have been very clear on what

worse this led to an attitude in the company

that brand represents and what its goals are for

that every business is a growth business, and an

cash generation and contribution to the earnings

attitude to R&D spending where everyone gets

of the company. That business model is all about

the same level of investment, and people across

efficiency and quality of supply to our customers

the company felt almost entitled to a certain

at a price point that allows them to really be com-

level of investment.

petitive. Customers are not asking for a lot of product innovation in that space, so that would be

But in the early 2000s, we could see that parts of

an area where we are not going to put research

our portfolio were maturing and becoming less

dollars, except toward process improvements.

differentiated, and the service-intensive specialtychemical approach to doing business was no

At the same time, we have been very clear on the

longer wanted by parts of our customer base. Those

differentiated side of the company about which

customers were mainly interested in the most

areas we wish to invest in and what our customer

competitive prices for undifferentiated products,

acceptance and financial expectations are, and we

backed by reliable supply. Seeing this and

have shifted resources to priority areas.

recognizing that there was going to be more of this trend coming was a major driver for us

We had to communicate clearly that it’s just as im-

in our design of the Xiameter business model. We

portant to work in area A as area B, and that

couldn’t treat those more price-sensitive and

both are critical to serve our customers. We’re

innovation-insensitive customers the same as our

going to create growth in each unit, but they

specialty customers. And so we separated our

have different mandates and deliverables. It has

product offering into two brands: the Xiameter

taken time to get the teams comfortable with

brand and the Dow Corning brand.

this, but now people see the success and so they are buying into it with great commitment.

Gregg Zank: And at the same time, we recognized

that we needed to rethink our approach to

I think that one advantage we have culturally is

new-product innovation across all our businesses.

that we have employees who are extremely creative

To get better returns, we saw that we couldn’t

and willing to try new things, and who do not

invest in every market the same, but we needed to

resist change the way that perhaps they do in some

be selective and choose those innovation areas

other companies. We’ve worked hard on encourag-

where we’re going to get the biggest returns and

ing the dynamic that it’s healthy to embrace change.

have the biggest impact on the company.

It comes down to leadership and clarity of purpose.

Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank

Stephanie Burns

Vital statistics
Born 1955
Married, with 1 child
Education
Graduated with a PhD in organic chemistry, with a specialty in organosilicons, in 1982 from Iowa State University Pursued postdoctoral studies at Université
Montpellier 2 Sciences et
Techniques, France
Career highlights
Dow Corning
(1983–present)
(2006–present)
Chairman
and (2004–present) chief executive

(2003–2010)
President
(2000–2003)
Executive vice president for global operations
(1997–2000)
Director of the electronics and life-sciences businesses and of science and technology for Europe
(1994–1997)
Director of women’s health

25

Fast facts
Incoming chairman of the
American Chemistry
Council
Member of the board of
GlaxoSmithKline and of the Society for Women’s
Health Research
Appointed to the
President’s Export Council in 2010
Named to Forbes.com’s list of the world’s 100 most powerful women

(1983–1994)
Positions in laboratory research, product development, science and technology, and business management This certainly has required changes in behavior.

Dow Corning—and add more clarity. We still

Take the salespeople in our specialty-chemical

had some undifferentiated products managed by

business: their job out in the field is to do new-

our specialty business, and by moving them to

business development and work with cus-

Xiameter, we have been able to serve our cus-

tomers on new areas of growth—it’s not to go in

tomers with more clarity.

and sell existing products to existing customers with the same application that they’ve

We will do that kind of fine-tuning constantly

sold for the past five years. So they’ve had a real

in the future. A product may currently be man-

change in their mandate.

aged by our life-sciences business or industrial-

With our relaunch of Xiameter in 2009, not

ture, we’re going to challenge the business every

intermediates business, but as the products maonly did we put more products into Xiameter but

year: should that be a Dow Corning–branded

we also continued to fine-tune these two busi-

product or should it be managed by Xiameter?

ness models—Xiameter and specialty-oriented

And we’ll move products over as appropriate.

26

McKinsey on Chemicals Winter 2011

Gregg Zank

Vital statistics
Born 1958
Married, with 2 children

(2002–03)
Program leader for newbusiness development

Education
Graduated with a PhD in inorganic chemistry in
1985 from the University of Illinois at UrbanaChampaign

(1985–2002)
Positions in research, product development, and new-business management Career highlights
Dow Corning
(1985–present)
(2009–present)
Senior vice president

Fast facts
Holds 30 patents for innovations including those related to advanced composites, rechargeable batteries, and hightemperature thermosetting polymers Reviewer with the National
Science Foundation
Member of the board of directors of the Michigan
Molecular Institute
Member of Michigan’s
Climate Action Council
Recipient of the American
Chemical Society’s Earle
B. Barnes Award in 2009

(2003–present)
Chief technology officer and executive director for specialties and technology

Meanwhile, we are getting new specialty products

the undifferentiated area. For instance, do we have

from our innovation efforts to expand our

intellectual property protecting our product,

Dow Corning portfolio that more than offset what

or are there a lot of similar products on offer from

is moved to Xiameter.

the competition? And when we go to visit the customer, are we meeting with the new-business

McKinsey on Chemicals: How do you know

developer or only with the procurement team?

when a product should move to Xiameter, and

That’s a pretty strong signal right there.

what are the challenges and opportunities?
Stephanie Burns: But it’s important to recGregg Zank: It’s not by our definition that a

ognize that there is a huge opportunity in the

product is no longer differentiated—it’s our

Xiameter model, not only in providing customers

customers’ and the marketplace’s. That in turn

with reliable supply at a certain price point but

reinforces the message within the company

also for the company overall as the low-cost,

that we have to embrace this new business model.

highly efficient supplier. We are winning at that

There are clear signals when a product is in

low-cost game, and we’re going to continue to

Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank

win. We’ve got fully utilized assets and efficiencies

the same time, there may be a need to explore a

in our manufacturing operations that we believe

new business model, packaging, or delivery

are the most competitive in the industry.

27

method, for example, to successfully deploy a product line in a certain region.

The offtake of the large, low-cost plants also goes into our specialty business, where we develop

Stephanie Burns: In business-model innovation,

finished, formulated products, and we get a lot

our big “aha” came with Xiameter. That really

more value than just selling the basic inter-

opened the door for us to think differently,

mediates. So the innovation that goes on in our

and we’ve realized that new business models are

specialty plants that leverages this low-cost

just as critical for new-product development as

position is a wonderful synergy.

they are in the more mature parts of our business.
We deployed new ways of working with our

And at the same time, there are a lot of innovation

partners: for instance, faster prototyping or finding

challenges posed by the Xiameter side of the

different ways to more quickly establish

business. For instance, how do we get a product

profitability. And in our polysilicon business, we

line’s cost down to stay competitive and make

have implemented new business models

the right level of return? There’s a lot of energy

designed to ensure that we meet our needs and

and excitement going into improving manu-

our customers’ needs.

facturing and process efficiency, as well as on the business and commercial side. It can be just

McKinsey on Chemicals: How do you steer

as exciting as new-product innovation.

your new-product innovation approach?

McKinsey on Chemicals: What are your

Gregg Zank: We want to focus on areas that are

thoughts on new-product versus business-model

driven by large societal trends and needs in

innovation?

the world—megatrends—because we know those trends are going to drive discontinuities in

Gregg Zank: It’s not black-and-white. The days

the marketplace. There are a number of areas we

are gone when you could just make a new

are particularly interested in. These include

product and customers would beat a path to your

health care and personal care, renewable energy,

door. To be successful in the marketplace

construction, and electronics—where we are

and establish a sustainable competitive advantage

looking at the ever-expanding demand for devices

requires a combination of approaches. The key

and the merger of electronics with other areas

for us is customer intimacy, which guides us as to

such as photonics and biotechnology. And we are

which levers of innovation we should employ—

watching how megatrends—such as energy scarcity,

how much new product and new technology, how

urbanization, and others—interact with these.

much new solutions, and how much businessmodel innovation. It’s also important to consider

When you’re tied into those discontinuities, it just

regional differences: mature products in one

means the market opportunity is big. You’re

region may be innovative products in another. At

not in there fighting tooth and nail using price and

28

McKinsey on Chemicals Winter 2011

other levers for a piece of a limited-size market—

that. We’re not just saying there’s a wonderful

instead you’re in a market that is expanding

megatrend out there in the demographic of an

rapidly. Light-emitting diodes (LEDs) are a great

aging population and we’re going to invest all our

example—they’re now showing up in flashlights,

projects against it, but instead, we’re defining

displays, traffic lights, and in automobile exteriors

where the opportunities are for Dow Corning.

and interiors, and they have the potential to

We’ve been improving that process and have

keep growing into areas of commercial and

started to integrate it across the company.

residential construction.
McKinsey on Chemicals: How does the

Encapsulants for LEDs have been a great success

process work?

story for us. We started the work in the late 1990s, and it became a new-business program in the

Gregg Zank: Our underlying challenge was to

early 2000s that was sheltered even though it was

improve the way we develop a raw idea into

not making any money. We backed it because

something tangible. The approach we now use is

we knew it was going to be a hit. We had key intel-

to work very intensively for a highly com-

lectual property; it’s a very enabling tech-

pressed period of time—10 to 12 weeks. We will

nology; and we were ready to go when the market

take something as large as the societal impact

was ready. Our encapsulant business has

of an aging population and distill that down with

grown dramatically over the past five years.

numerous interviews outside the company. We

We are on the lookout for developments that are

undertake a lot of strategic marketing—both

truly going to be disruptive and try to tie

technical people, who are in my opinion very good

ourselves to them. We constantly challenge our-

early-stage strategic marketers because they

dedicate a group of employees around the world to

selves and refresh that list of the large trends

ask a lot of difficult questions, and commercial

that we should be looking at, and then we ask, how

folks. Then we have weekly meetings to say, what

can silicon-based materials provide a solution?

have we learned about this area? It’s got to be a large opportunity, it’s got to get marketplace

Stephanie Burns: What we’ve been doing over

acceptance within a certain time frame, and it’s

the past four years is to take these megatrends

got to be something that is not incremental to

and apply filters that narrow them down to what

what we are already doing. We assess the

really could be the opportunity, and identify

applicability of our scientific tool kit against the

how best our technology and competencies match

opportunity and create an early proposal.

There’s a level of research expenditure that must be maintained even in tough times—it’s not discretionary spending; it’s required

Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank

We pressure-test the proposals from the points of

associated with them to represent a large area of

view of technology, the market, the supply chain,

29

growth for a significant amount of time?

and whether it will still be a good opportunity if some other external factors change. It is a difficult

Stephanie Burns: We also have to take some

thing for the team to go through because they

care managing the filtering part of the

want to chase five things and they only have time

process—this is the painful part, where you have

to get two worked up as full business proposals.

to let go of ideas early on that you don’t think

But I’m insistent that as we go through this, we

are a hit and stay focused on the ones that look

capture and document all the things that we leave

promising. When we started this process,

on the side as well, because they may be relevant

our people got so enthused by innovation and

for some of our other existing businesses. In

sustainability and improving our planet, and they

addition, the process can help us identify markets

were buying in fast and looking at things that

that are starting to move and make us check if we

we knew were not going to fly. But you’ve got to let

are in tune with them. Are they on our radar

them expand the lists of ideas, so that they say,

screen, and how are we interacting in the value

this is new and exciting, and to make sure they’re

chain of those markets?

going along the path with you. You can’t shut it off prematurely; you have to let it run its course.

We undertake this process twice a year. In addition to identifying opportunities, it completely

McKinsey on Chemicals: What are examples of

energizes the entire company, because there is

megatrend-linked work?

not only a core team but also a broader team that gets involved because there are Web calls for

Gregg Zank: One of the problems with the aging

information, where people can contribute, so

population is diseases that make bones brittle.

everybody is a part of it. We end up with a pretty

So you can look at ways to protect the human

robust portfolio of initiatives as the process

body from falls or ways to better enhance bone

cycle proceeds.

growth in aging people. Since there is research relating bone strength to silica intake, we said,

McKinsey on Chemicals: Have any cultural

is there a way to help uptake of silicic acid or silica

issues emerged with the adoption of the

into the body to help bones be less brittle? An-

megatrends approach?

other is enhancing aging bodies’ efficiency in absorbing medicinal drugs, and so, is there some

Gregg Zank: The danger we have run into is not

way to use silicones to help the uptake of drugs?

so much resistance as that everyone reframes what was already going on to be part of a mega-

Stephanie Burns: We also see megatrends

trend, and everything becomes a green-energy

intersect. For example, one of the trends

project or an aging-population project. That’s why

with an aging population is that baby boomers

we have these filters and say, OK, within the

want to live in their own homes rather than

aging population, what are the big things that we

in a nursing home. To take care of them and make

think we can have an impact on and that have

sure they’re safe, third parties observe them

enough discontinuities and opportunities

in their homes, and so there are new electronics

30

McKinsey on Chemicals Winter 2011

applications, as you get to surveillance

Stephanie Burns: I’d argue our chemistry

cameras and sensors. In other words, the elec-

set is probably more complex than most

tronics megatrend intersects with the aging-

companies’, and our expertise in that chemistry

population megatrend.

set allows us to do so many more things. I am constantly amazed at the potential of silicon

McKinsey on Chemicals: Dow Corning

technology to meet the needs of current and

seems to have shifted its R&D talent strategy to

future advanced applications.

include more than just silicone chemists, hiring physicists, materials scientists, and even

I think we are able to build closer and stronger

industrial designers. How has this new

relationships with customers because our

combination changed the innovation problem-

silicon-based expertise can be so enabling for

solving dynamic?

them. Take skin-care product makers: they use thousands of different ingredients to make

Gregg Zank: It’s a great new dynamic. When you

formulations, but the silicone ingredient

combine a silicone chemist with a material

enables that formulation to perform, and that

scientist, a ceramist, and a metallurgist, you get

gives us privileged access to their research

some very robust technology debates, and you

department. And we’ve deliberately built up

get to a good answer—not yet necessarily the right

a capability we call “application expertise,” where

answer—but one you have a lot more confidence

we have scientists who are world-renowned

in, because you did not just charge down one path.

experts in many of our customers’ applications.
In hair care, for example, we have globally

Stephanie Burns: Here’s an example. We know a

respected experts on how to test products on

lot of our customers buy our materials for the

hair, and our personal-care customers rec-

aesthetic properties—the feel, or “hand,” as it’s

ognize and respect these experts’ work.

called, the silky touch, the visual appearance. But we realized that there’s a whole element in how

McKinsey on Chemicals: How much time do

customers make buying decisions that we did not

you as CEO spend on innovation?

fully understand. When silicone ends up in a piece of furniture or cookware, we don’t know who

Stephanie Burns: As CEO, I would say around

these people are who are selecting the product.

15 percent on a pure innovation basis, but

When a maker of handheld electronic devices looks

innovation is part of everything we do, so it is

at silicones, they are looking for the customer

difficult to estimate. I do have a very full

experience as well as the electronic-circuitry per-

understanding of the innovation portfolio, which

formance, which we always focused on. So we

is on all our major executive-meeting agendas.

brought in an industrial-design engineer who thinks completely differently from a chemist or

McKinsey on Chemicals: What does it mean to

physicist, and this brings a totally different

have a scientist as CEO?

dynamic to the team’s interactions.
Stephanie Burns: When I am out with R&D
McKinsey on Chemicals: Is being just in silicon

folks and teams that are bringing projects

chemistry a limitation?

forward, there’s probably an ease of discussion

Innovation in chemicals: An interview with Dow Corning’s Stephanie Burns and Gregg Zank

and a connectivity that takes place. The last

31

Some of our big successes today had their

time I was with our compound semiconductor

genesis back in the late 1990s. In tough economic

research team, for instance, I understood

times, you’re looking to squeeze anything

exactly what they were doing and the progress

you can, and innovation is not immune to that, but

they have made in advancing silicon carbide

there’s a level of research expenditure that must

wafer-production technology.

be maintained—it’s not discretionary expenditure.
It’s required.

Most important, I think I probably have, compared with a nonscientist, a better understanding that this innovation stuff takes time to come to fruition, and that you’ve got to keep these investments consistent and you cannot flip-flop.

Bob Frei (Bob_Frei@McKinsey.com) is a director in McKinsey’s Chicago office, and Chris Musso
(Chris_Musso@McKinsey.com) is an expert principal in the Cleveland office.

32

Capturing the lean energy opportunity in chemical manufacturing High energy prices and climate-change concerns are driving new interest in energy efficiency. Companies can adapt their lean tools and approaches to capture significant energy savings.

Frank Plasschaert,
Ken Somers, and Gautam Swaroop

Between 1990 and 2009, chemical companies

the industry over the past decade. European

were among the many industrial and man-

chemical companies, for example, have

ufacturing companies that boosted corporate

seen energy costs increase from 5 percent of total

performance by adopting lean production

costs in 2002 to about 12 percent in 2009,

methods to optimize material and labor pro1 
The study, conducted from

2005 to 2008 by McKinsey and the London School of
Economics, looked closely at how well manufacturing companies adopted proven best practices, such as lean, and at the relationship between these efforts and financial results. An early view on the research, published in 2006, is described in “The link between management and productivity,” by Stephen J. Dorgan,
John J. Dowdy, and Thomas
M. Rippin, available at www.mckinseyquarterly.com. driven primarily by rising oil prices, which have

ductivity. Indeed, a multiyear study of how

remained relatively high despite the

well thousands of manufacturing companies in

economic slowdown.

North America, Europe, and Asia adopted
Most companies have taken steps to lower their

management best practices (including lean) highlighted just how important these practices are to a company’s economic success (Exhibit

1).1

energy intensity (the amount of energy consumed per unit produced). The return on efforts to optimize energy usage was gen-

However, most chemical companies that have

erally three times greater in 2009 than in the

adopted lean techniques have not incorporated,

1990s, and one major focus has been large

or have only partly incorporated, lean techniques

capital-investment projects to capture energy

for increasing energy efficiency, even though

savings, such as combined heat and power

energy costs have reemerged as a major issue for

(CHP) plants. Energy-efficiency initiatives also

33

enable companies to cut carbon dioxide emissions,

efforts first to holistically map out energy

thus providing companies with the means

consumption at each step in their operating

both to do the right thing and to save money.

processes or to identify specific energy waste in their production systems, and then to

Traditional lean programs typically identify

use lean techniques to focus on opportunities

savings that can be gained by improving every

to reduce waste.

aspect of a manufacturing step, and this can include energy savings. But in our experience,

We have found that most chemical companies can

traditional lean programs enable companies

substantially improve the overall energy effi-

to realize only about one-sixth of their potential
McKinsey on Chemicals 2010 energy energy efficiencyrest on the table.
Lean savings—leaving the

Why? Few1 of 3
Exhibit companies are making systematic

Exhibit 1

ciency of their operations when they apply lean tools and approaches that have been translated and adapted to cover energy use (Exhibit 2).

An analysis of the development of energy productivity over time suggests substantial improvement potential.

Current capabilities Historical productivity improvements New requirements to increase energy productivity • Optimizing

Factor input per unit of value added, indexed

• Including

lead and cycle times and preventing waste • Managing organization using key performance indicators (KPIs) for quality and lead and cycle times • Training and leading employees in shortening lead and cycle times and improving quality 350

Labor productivity 300
250
200

Material productivity 150

Energy productivity energy efficiency in optimization levers
• Making energy consumption transparent
• Making waste detection systematic • Developing methods to reduce waste
• Incorporating energy
KPIs in management/ governance systems
• Building capabilities for continual energyefficiency improvement

100
50
0
1960

1970

1980

1990

2000

Source: Bundesministerium für Umwelt, Naturschutz, und Reaktorsicherheit (BMU) 2007; McKinsey analysis

34

McKinsey on Chemicals Winter 2011

McKinsey on Chemicals 2010
Lean energy efficiency
Exhibit 2 of 3

Exhibit 2

Incorporating energy efficiency into lean methodology: there are eight kinds of waste for energy.
Kind of waste

Definition

Example

Overproduction

Producing excess energy (input energy that is unused)

Venting excess steam

Waiting

Consuming energy while production is stopped

Keeping stirrers at full speed in reactor while production batch is analyzed

Transportation

Inefficient transportation of energy

Leaks and heat radiation in steam network

Overspecification

Process energy consumption
(deliberately) higher than necessary

Standardized reflux rates in distillation columns for all product specifications

Inventory

Stored goods use/lose energy

Using uninsulated tanks in tank farms where product must be kept heated

Rework/scrap

Insufficient reintegration in upstream process when quality is inadequate

Redrying polymer fines that did not get coagulated in drying process

Motion
(inefficient processes)

Energy-inefficient processes

Excess oxygen in steam boiler

Employee potential/intellect Failure to use people’s potential to identify and prevent energy waste

Employees not involved in developing energy-saving initiatives

Savings vary by sector, but typical savings for

Taking the lean path to improving

chemical companies can be 10 to 20 percent—and

energy efficiency

in some cases, substantially higher. Importantly,

Companies can realize these gains by incor-

all these savings can be achieved with limited

porating energy-efficiency analyses and

investment and payback periods of three

techniques into their existing lean approaches in

years or less. Energy consumption has tradi-

four ways. First, they can focus specifically on

tionally been managed more carefully in

energy consumption and then system-

the chemical industry’s most energy-intensive

atically identify waste as they would in any other

processes, such as steam cracking or ammo-

lean program (Exhibit 3). Translating the lean

nia and chlor-alkali production, where energy is

value-add identification methodology to the energy

a major cost element. Nevertheless, we have

context, the approach here is to map energy

seen savings of up to 5 percent achievable in

consumption at every step of a company’s

such cases—important gains on such large

operating processes. The next step is to calculate

energy volumes.

the thermodynamically minimum energy

Capturing the lean energy opportunity in chemical manufacturing

35

McKinsey on Chemicals 2010
Lean energy efficiency
Exhibit 3 of 3

Exhibit 3

Building the theoretical limit for heat consumption creates clarity on losses while identifying potential key performance indicators.
Description
Heat consumed by plants 1 and 2

100

Transportation
1
Vented steam Incidental

6

Heat exchangers Heat in steam is lost during transportation, ie, through piping
Steam vented because of plant imbalance for flash steam reuse
Heat-exchanger insulation losses

1
Heat content of air entering scrubber

Exhaust gases 13

Radiation and air leaks

5

Radiation and air leaks of dryer shell

Heat consumed by dryer when not running

Availability
1
Performance
8
OEE EE1

Input/output quality Variation in moisture input and output
1

Rework
2
Theoretical limit for plants 1 and 2

1Energy

Difference between actual performance and best performance; no load losses present, as line runs almost 100% variable

62

Heat necessary to reheat recirculated fines in dryers

–38%

efficiency (EE) linked to overall-equipment-efficiency (OEE) levers.

• Modular

approach makes technical limit work for both complex and simple sites
• Offers potential to track progress through update at regular intervals after standardization • Signals key performance indicators to optimize at frontline level

36

McKinsey on Chemicals Winter 2011

required for each process (its “theoretical limit”)

remainder for 90 percent of the time, eliminating

and evaluate actual consumption against this

the need to keep them heated when they were

theoretical limit. This analysis reveals where

not being used.

energy is being wasted and how loss can be avoided, and it also provides a powerful

A second way companies can extend their lean

motivating tool for site personnel to push for

programs to improve energy efficiency is by

new ideas.

optimizing energy integration in heating and

One US surfactant maker, for example, undertook

analysis. A chemical company changed its process

a heat value-add analysis and found that only

to release heat more quickly during polymer-

10 percent of the steam heat inputs were actually

ization, allowing evaporation to start sooner and

cooling operations, moving beyond pinch

thermodynamically required to make its products;

saving energy on the subsequent drying stage.

90 percent were wasted. Once the causes of the

The total savings from both steps amounted to 10

waste were identified, more than 20 measures

percent and brought the production line close to

were planned to address the problem. These

the industry cost benchmark. In another example,

measures would allow the company to capture

a chlor-alkali maker undertook a number of

steam savings worth $600,000 per year, and the

measures to avoid heat loss and to capture waste

investment would be paid back within three

heat via heat exchangers that enabled it to

years. Loss of steam as it was piped around the

raise the temperature of the brine solution so that

plant represented one of the largest sources of

the electrolysis could attain a higher efficiency

waste, and it was addressed by insulating lines,

level. The investment paid for itself in a year and

repairing steam traps, and simply repairing leaks.

lowered energy consumption by 2 percent—a

The measures also included writing a new

significant reduction, given the size of the chlor-

algorithm for the software steering the company’s

alkali producer’s power bill.

heating and cooling control loop, making possible
5 percent savings on total steam consumption.

A third way that companies can use lean ap-

This initiative alone resulted in $75,000 per year

proaches is to identify process-design and equip-

of savings for just two days of the company’s

ment changes that can deliver greater energy

software engineer’s time.

efficiency. As already mentioned, chemical com-

In another example, a chemical producer was able

with substantial capital expenditures to capture

panies have responded to higher energy prices to reduce the energy bill on its storage operation

energy savings. Complementing this, lean

by 50 percent by reorganizing its tank-storage

methodology makes an important contribution

strategy. Previously, it had operated multiple

by helping to identify numerous smaller invest-

storage tanks, all of which had to be kept heated.

ments that can add up to major energy savings.

By changing its storage procedure—following lean thinking on optimizing inventory to minimize

One chemical producer replaced traditional fixed-

waste, here with an energy focus—it consolidated

speed air compressors with high-efficiency

on a limited number of tanks and closed the

variable-speed compressors, which led to savings

Capturing the lean energy opportunity in chemical manufacturing

of up to 40 percent of electricity consumed to

37

$2 million in additional boiler capacity. By

power its compressors—paying back the €200,000

improving consumption planning, it was possible

investment in less than two years. Another

to make sure that demand would not pass the

company installed a blower-dryer combination to

threshold that triggered pressure drops, and so

avoid using compressed air as a dry air source,

the company was able to avoid making the

and it saved €30,000 a year for an investment of

boiler investment. At another site, a company

€50,000. And at another site, a company in-

captured substantial savings when it was able to

stalled a new heat sensor that enabled it to better

get an accurate demand forecast from a third-party

manage its energy output—again having iden-

user it supplied. Previously, the producer had

tified energy waste through the lean approach—

maintained steam production at the ready to meet

and achieved savings of €64,000 per year

unpredictable demand from its third-party user,

for an investment of just €1,000.

but once it knew the demand timetable, it was able to put its boiler in power-saving mode

A fourth area where lean energy approaches can

during downtime.

eliminate waste and capture savings is optimizing the interface between producers—steam-

To ensure that the gains are sustainable, companies

boiler operators, cooling-water-unit operators,

must put into place a performance-management

and power suppliers—and consumers. One

system for energy efficiency that will provide an

chemical plant was reaching its boiler capacity

objective basis for discussion. One company,

and experiencing pressure drops at demand

for instance, spent about $300 million on energy

spikes, and it was therefore getting ready to invest

a year, but it was having difficulties estab-

38

McKinsey on Chemicals Winter 2011

Focusing on theoretical limits stretches the organization’s aspirations for energy savings that can be achieved with the existing asset configuration and product requirements lishing appropriate key performance indicators

will quickly devolve into an analysis of variance

(KPIs) for energy because it had little sense

that leads only to incremental changes. Focusing

of how KPIs would change in response to oper-

instead on theoretically achievable energy

ating decisions. As a result, it did not change

efficiencies and on the identification of specific

its KPIs for two years. Once the company under-

types of losses between actual and theoretical

stood how it should correct for factors that

positions enables a far more fruitful discussion

play a part in energy consumption—such as price

on potential improvement levers. Such a conver-

fluctuations, product mix, and throughput—

sation will generate strong insights into the type

the company was able to install meaningful KPIs.

and size of losses, and it forms a clearly quantified

With these in place, the company was then

basis for relentlessly focusing on loss reduction.

able to make appropriate decisions and raise its energy efficiency.

Set up the right metrics. Frequently, the challenge for low-cost improvement starts with

Lean energy: The priority list

insufficient energy-consumption metering and

for management

energy-generation cost allocation. Improving

Implementing these lean energy-efficiency tools

these enables companies to identify operating

and approaches will require some new manage-

changes that lower energy usage, such as reducing

ment approaches. Senior management at chem-

standby times. Better information about con-

ical companies will need to take several steps:

sumption and cost allocation also helps in developing meaningful KPIs. With a combination of

Focus attention on operational improvements

energy-efficiency planning and employee training,

versus the theoretical limit. In our experience,

low-cost, sustainable savings can be achieved.

the most successful companies have moved their

Relevant metrics would then include a clear cor-

managers from a benchmarking mind-set to

rection for product mix, quality losses, and

one focused instead on opportunities and closing

throughput variation.

gaps to theoretical limits for energy savings.
This stretches the organization’s aspirations for

Set targets for developing ideas. Companies

the energy savings that can be achieved with

must signal the importance of energy-cost

the existing asset configuration and product re-

reduction to employees and communicate this

quirements. Given the product mix and site

opportunity in the existing language of lean,

specificity of energy production, transport, and

and they should set targets to develop break-

consumption, the benchmarking discussion

through energy-efficiency ideas. For instance,

Capturing the lean energy opportunity in chemical manufacturing

39

they should emphasize the importance of

Put teams of experts in place. Many of the

ideas that involve little or no capital expenditure

leading players in energy efficiency have invested

and that are generated through frontline

in developing coaches trained in the discovery

engagement with plant workers, cross-functional

of energy waste, which is often invisible and tends

problem solving, and changes in mind-sets

to be spread across an entire plant. Identifying

and behaviors. In addition, senior managers should

that waste requires specific technical knowledge,

arm themselves with examples of what can be

for example, steam production network

achieved—borrowing ideas from industry peers

economics or pinch analysis. In addition to

if necessary.

technical knowledge, coaches must possess the ability to tap into frontline knowledge in order to identify solutions and mobilize personnel to capture savings in a manner similar to typical lean programs.

Frank Plasschaert (Frank_Plasschaert@McKinsey.com) is a principal in McKinsey’s Antwerp office, where
Ken Somers (Ken_Somers@McKinsey.com) is a consultant. Gautam Swaroop (Gautam_Swaroop@McKinsey.com) is an associate principal in the Delhi office.

40

Improving pricing and sales execution in chemicals
Some chemical companies have blind spots when it comes to steering sales—and they pay a high price in lost margins and growth. A sales-management approach built around a more granular level of insights makes it possible to improve sales execution and boost returns.

Joel Claret,
Dieter Kiewell,
Soenke Lehmitz, and Prashant Vaze

It is well recognized that improving companies’

four main hurdles. First, although it is well

pricing and sales execution can have a significant

established that sales profitability rather than

impact on profitability. Our data, covering more

sales volume is key to a company’s performance,

than 1,000 commercial performance-improvement

some chemical companies still do not have

initiatives in a range of industries, show that

a clear understanding of the profitability of

when they are successful, such initiatives typically

geographical regions, product lines, and in-

translate into an improvement in return on

dividual customers or transactions, which can

sales (ROS) of between 2 and 7 percent and lead

guide pricing and sales decisions. This is not

to additional sales growth as well. In the chemical

for lack of data: most companies have copious

industry, successful pricing and sales-execution

sales information available through their

initiatives have mirrored these results in a variety

enterprise-resource-planning (ERP) systems.

of portfolios that encompass both specialty

But many companies are not able to orga-

chemicals and commodities.

nize or interpret the data appropriately to provide transparency on profitability, and so their

What is specific to chemicals? Initiatives to im-

sales representatives lack the right data to guide

prove pricing and sales execution must overcome

them when they are agreeing on sales contracts.

41

Next, the chemical industry’s asset intensity

individual salespeople with only simple metrics,

encourages plants to be run flat out, generating

which limits their ability to steer their sales

production surpluses, and companies fre-

force’s actions in the most effective way and

quently suffer “leakage” from their official pricing

improve performance.

structure, as production surpluses must be placed. If sales representatives are given incen-

Boosting sales and pricing performance

tives based on volume or revenue, they are

based on detailed and real-time market

likely to award ad hoc discounts and make other

and customer insights

accommodations, such as offering free services,

These hurdles represent substantial and inter-

to win sales. Sales management, meanwhile, has

connected challenges that hold back many

difficulty precisely assessing the impact this

chemical companies’ ROS performance. We

has on margins and enforcing behavior that will

have found that the four-step approach described

maintain profitability.

below can help companies tackle them and improve performance.

Third, the chemical sector has had to confront extreme volatility in raw-materials prices in

Chemical companies that have adopted this ap-

the past several years, creating serious challenges

proach have achieved substantial improvements

for products that are sold on longer-term con-

in ROS, with the degree of improvement depend-

tract periods than the company’s raw-materials

ing on their starting point and on the type of

purchase contracts. Many companies do not

business they are in. Companies mainly selling

have a clear understanding of which selling prices

commodities in the spot market have seen ROS

should rise and by how much—or, importantly,

improvements of 2 to 4 percent, while companies

how quickly—to pass along the cost increases and

that sell primarily through individual customer

maintain profitability. Lacking this information,

negotiations have captured improvements of 3 to

companies may find it difficult to provide appro-

6 percentage points of margin; companies that

priate and timely guidance to their sales forces on

sell customized products and solutions have

the price levels needed to maintain profitability.

achieved ROS improvements of between 5 and 8 percentage points of margin. In some very

Finally, some chemical companies have a sales-

selective special-product and service cases, ROS

force skills gap. Their salespeople are good

improvements of as much as 20 percentage points

at the traditional job of placing volume that keeps

of margin have been captured, but this requires

their production plants loaded, but many sales

a granular approach that allows players to identify

people have limited abilities to analyze sales data

niche products and services where they have a

and limited negotiating skills to act on what

true competitive advantage and where they can

the data show. This imposes a serious handicap on

implement value-pricing approaches to capture

companies that want to move beyond simply

the full potential value of their offering. These ROS

recouping their costs to capturing pricing that re-

improvements have typically been achieved

flects the distinctiveness of their product and

within two years—and in some cases as quickly as

its value to different customer segments. At the

within nine months.

same time, some companies are monitoring

42

McKinsey on Chemicals Winter 2011

1. Discovering the sales portfolio’s true profitability

Factors that should be examined include the more

The first step that enables chemical companies

obvious, such as sales prices, and the less

to make improvements in pricing and sales

apparent, such as “cost to serve”—in other words,

execution is to establish full transparency into

companies should make a full assessment of

the factors that drive the profitability and

all the costs associated with supplying a customer.

growth of geographic regions, product lines, and

Many of these costs are not immediately visible.

individual customers and transactions. The

It is important to identify customer behaviors

analyses that must be carried out include the pro-

that impose additional costs but that are not

fitability of customers by volume and segment,

captured in ERP-based information. For example,

price performance and profitability across micro-

a customer might make last-minute changes

markets, and on Chemicals 2010
McKinsey changes over time with regard

to an order that result in the chemical company

to margin, volume, and churn by customers and
Periscope

Exhibit

incurring additional but hidden handling and

segments 1 of 1
Exhibit (exhibit).

logistical costs. Similarly, some customers make

Achieving transparency into the drivers of profitability opens the way for performance improvements.
€ per kilogram
Contribution margin per unit, Q3 2009—Q4 2009
12.44
61.60

Average margin in Q3

0.18

61.78

0

Lost
ConVolume
business tinued effect business in Q3, average margin

Source: McKinsey Periscope Platform

–1.25

0

–1.21

Portfolio- Pricing mix effect up

–0.10 –10.43
61.23

Pricing down Exchangerate impact 0.71

Effects of Increase ConNew disin tinued business counting variable business acquired costs in Q4, average margin

61.94

Average margin for Q4 overall Improving pricing and sales execution in chemicals

extensive use of companies’ laboratory ser-

43

that reflects the cost to serve, customer price sen-

vices and technical support, but these additional

sitivity, and its competitive positioning. New

costs are often not reflected in the prices

pricing guidelines, as well as go-to-market and

charged to them.

service-level guidelines, should also be established to reflect these profitability targets.

It is also important for senior sales management to enforce a standardized approach to measuring

Companies can also use guidelines to steer

account profitability across geographies. Fre-

the sales force to capture premium pricing on

quently, different national sales organizations

products if it is merited. For example, one

apply different metrics. These national differ-

specialty-chemical company had a product with

ences make it difficult to effectively manage

distinctive characteristics that provided benefits

performance across regional or global markets.

in certain end-use markets that the company knew gave it the opportunity to charge a higher

Building on this, companies can conduct further

premium in those markets than in others. The

analyses on price performance and profitability

company created guidelines for the sales force to

for individual customers compared with the

capture that premium on the product in the

total portfolio, examine price leakages from gross

particular application, backed up by differentiated

price to net price and then to contribution mar-

branding of the product. It also started to

gin, and look at cost to serve and leakage for

educate its salespeople about where to look for

different customers. These analyses provide a

this type of value-pricing opportunity.

wealth of insights on the true levels of profitability of the company’s businesses, and they

When setting such guidelines, we have observed

can inform targeted pricing actions to capture

that one effective approach is for companies to

the profitability improvement potential.

simulate the impact of their price-setting actions.
This allows the company to model changes

2. Pricing to maximize value capture on

in raw-materials and other costs and then enter

each transaction

prices for a region, country, customer group,

Once the company has gained insights into pro-

or product line. In this way, it can see the impact

fitability, it can start to address its sales per-

on ROS coming from each change. A company

formance, and here pricing is a top priority. The

that produces surfactants, which found that its

first area on which to focus is setting pricing

ethylene oxide costs were increasing, was able

guidelines. These guidelines are created by de-

to model how much it would need to increase

vising action plans for certain customer or pro-

prices to maintain its margins and then set

duct groups; such action plans include deciding

pricing guidelines accordingly for its sales force.

on target profitability levels and price points.
3. Steering the sales force to get the best
For example, if a company identifies that pro-

possible deal

fitability at its small customers is too low because

The third step focuses on sales execution. This is

of the additional complexity entailed in appro-

an area where some chemical companies need to

priately serving this segment, it should reset its

improve, particularly when preparing their sales

profitability targets for the segment in a way

representatives for negotiations with customers.

44

McKinsey on Chemicals Winter 2011

We have observed that while chemicals sales

focus on, for example, directing a salesperson to

representatives are good at the traditional skill of

push volume sales in an area where price

securing sales volumes, many cannot negotiate

increases have been going through easily.

confidently with their customers’ procurement departments to secure price increases. Many reps

4. Establishing an integrated performance-

also lack the analytical skills to deal with sales

management system across the sales process,

data. Given that chemical companies are selling to

from the CEO to the salesperson in the field

many industries that have taken steps in recent

Many chemical companies steer their sales efforts

years to strengthen their procurement depart-

based on volume and on a superficial view of

ments, this puts chemical suppliers at a dis-

the contribution margins that they earn, but this

advantage. Sales representatives must be trained

represents a relatively crude instrument for

to look for ways that they can work with col-

steering the sales organization. Once the steps

leagues in their operations, freight, and finance

outlined above have been taken, best-practice

departments to fine-tune the offering that can be

companies put in place performance-management

provided to the customer, closing leakages and

systems that establish consistent key performance

tying up loose ends to improve service.

indicators (KPIs) for all their commercial activities.
Such systems go into a high level of detail,

An effective approach used by some best-practice

and the results are then consolidated into a single

companies is to provide the sales force with a

reporting system. While companies often have

tool for quoting prices in real time, which arms

different KPIs covered in different reports, an

the salesperson to get the best possible deal

integrated system makes it possible to track

from the customer. The tool’s algorithm incor-

everything in one consistent way. Management

porates pricing guidelines and supports the

can monitor overall pricing performance and

salesperson in finding the deal terms that capture

individual customers’ performance against tar-

the maximum value based on the supplier’s

gets, identifying the best- and worst-performing

distinctive position; it also includes the surcharges

accounts and products—the information is all at

needed to cover specific delivery and product-

their fingertips in one system.

quality requirements for the customer. Additionally, the tool gives the salesperson infor-

This kind of performance-management system

mation—for example, on different price, volume,

also transforms sales-force mind-sets. Tradi-

and delivery-term packages, and on margin—to

tionally, performance dialogues with sales-

be able to propose deal alternatives. All of this

people have focused on activities and volumes.

puts the salesperson in a position to negotiate

With the new system, KPIs are aligned with the

confidently with procurement departments.

goals of the sales organization and the sales staff, and it becomes possible, for example, to

At the same time, sales management can use the

monitor whether a salesperson captured the

tool to monitor sales reps in the field and maintain

target price set for an account. This more compre-

an ongoing dialogue on sales performance,

hensive system with new KPIs can provide regu-

reinforcing its intended messages. The historical

lar feedback to support more effective

data that the tool collects can also show sales

performance dialogues with the sales team—

management which customers and salespeople to

discussions that are focused on issue resolution.

Improving pricing and sales execution in chemicals

45

Beyond performance dialogues, the management

Our experience has shown that when applying

system provides a generally more effective way for

this four-step approach, the greatest benefit to

the company to steer the efforts of its sales force.

senior sales management comes from the analysis

Moving to higher ROS performance:

the highest impact on ROS performance. We have

of a limited number of key indicators that have
Success stories

developed Periscope, a platform that provides

Once these four steps have been taken, we have

tools and this type of focused information to

observed that companies are able to make

support pricing and sales execution. Additional

substantial improvements in ROS performance.

information is available at https://solutions.

Consider the initiatives taken by two chemical

mckinsey.com/catalog/periscope.html and from

companies. The first, a diversified global chemical

the authors.

company with a 500-person sales force, had been contending with declining ROS performance

Companies should also look at the potential that

for several years. This could be partly attributed

can be achieved by integrating this pricing and

to increasing competition from new suppliers in

sales-execution approach with a broader set

low-cost countries, but business segments not

of improvement initiatives that cover all the

affected by such competition were also in decline.

important dimensions of the commercial process.

The company embraced the approaches outlined

These initiatives include attending to organiza-

and applied them to its commercial operations;

tional setup and pricing processes, as well as

within 24 months, each of its business units

looking at how the company works across its

experienced improvements in ROS of 2 to 5

different functions to resolve pricing and margin-

percentage points.

management issues. The initiatives also cover capability building for sales management and

In the second case, a European petrochemical

frontline sales staff. This is a multiyear process,

company lacked full transparency on profitability

but it can allow a company to capture significant

levels in certain customer segments and channels.

additional margin independent of the chemical-

The transparency that was achieved using the

industry business cycle, as well as to make

approach we have described showed the company

silo-breaking, cross-functional improvements

that it could earn better returns by selling

that can carry company performance to a

directly rather than through distributors for parts

higher level.

of its business, and demonstrated that it should enforce new price guidelines for selected customer segments. Within six months, ROS had improved by more than 5 percentage points in the targeted segments and channels.

Joel Claret (Joel_Claret@McKinsey.com) is a director in McKinsey’s Geneva office, Dieter Kiewell (Dieter_Kiewell
@McKinsey.com) is a director in the London office, Soenke Lehmitz (Soenke_Lehmitz@McKinsey.com) is a principal in the Berlin office, and Prashant Vaze (Prashant_Vaze@McKinsey.com) is a principal in the Antwerp office.

46

Kick-starting organic growth
Even in a recovering economy, many companies see only limited potential to boost revenues and profits through organic growth. But there is a larger opportunity to capture: by targeting micromarkets and reorganizing the sales force to prioritize growth, companies can achieve growth rates well above the overall market.

Maximilian Coqui,
Manish Goyal,
Jason Grapski, and Soenke Lehmitz

Chemical companies face two challenges when

opportunities that are hidden when a more

seeking to grow organically in seemingly

generalized or average view is taken of the larger

saturated and highly competitive markets. First,

market.1 This is as true for the chemical

many companies have trouble finding oppor-

industry as it is for other industries and markets.

tunities. Second, even if they identify new areas to pursue, they find it difficult to motivate their

Sven Smit, and
Patrick Viguerie, The
Granularity of Growth,
Hoboken: John Wiley &
Sons, 2008, and Baghai,
Smit, and Viguerie,
“The granularity of growth,” McKinsey
Quarterly, May 2007, www.mckinseyquarterly.com. see these potential growth markets and

But while it is not easy to find growth oppor1 
See Mehrdad Baghai,

Why do chemical companies frequently fail to

sales forces to break old habits and take initiative.

translate them into new sales? One part of the

tunities in such markets and transform the sales

problem is that some companies do not do

force, companies should not give up.

enough homework on market prospects and are not keeping up-to-date on the shifting

Extensive McKinsey research shows that re-

customer base, notably when selling into

examining markets at a more detailed or granular

fragmented and changing markets. As a result,

level reveals large numbers of micromarkets that

companies lack insights, in any particular

present substantial organic-growth opportunities

geography, into where the fastest-growing and

well in excess of overall market-growth rates—

most profitable customers might be.

47

The second and related part of the problem stems

The approach, Micromarket Management (M3),

from how companies handle their sales forces.

has two main components. First, it adopts a

In the mature markets in which most chemical

granular lens to target micromarkets and pinpoint

companies in developed countries operate,

growth opportunities. Second, it focuses on

salespeople tend to have routine ways of looking

actionable steps at the sales-force level:

at and dealing with their customers. Directives

building strategies to pursue micromarket

from the top to prioritize new market segments

growth, boosting sales-force effectiveness and

often get lost in middle management and

providing incentives for the sales force to

are not transmitted to the sales force, and when

pursue growth, and strengthening underlying

they are, salespeople do not know how to

commercial capabilities.

follow through.
Defining and grouping micromarkets
The result is sales-force-led prioritization

For many senior managers in chemical

of customer development based on the

companies—in particular, those that serve a

ease of winning the customer, rather than an

market sector growing in line with GDP in

approach built on prioritizing customers

which multiple competitors are entrenched—the

based on their potential contribution to profit-

key question is where to find areas of growth.

ability. Making matters worse, many companies

Getting to the right answer can be a major chal-

do not use an incentive system that rewards

lenge for companies with hundreds or thou-

sales staff for seeking new growth accounts.

sands of customers. For companies that have succeeded with this approach, the first step is to

Not surprisingly, senior-management teams at

break the market down into manageable sub-

many chemical companies in developed

groups—or micromarkets—where the prospects

economies view grappling with these challenges

can be reviewed in detail. Such subgroups can be

as offering little growth. They see rallying

based on shared characteristics—notably, scale,

their sales forces once again to fight for gains in

type of industry, or degree of service intensity—or

this familiar territory as unrewarding trench

simply on geography. One specialty-chemical

warfare. Instead, many senior teams prefer to

company, for example, sorted its markets into geo-

focus on the seemingly more exciting prospects in

graphical regions and then grouped customers

M&A and on investments in fast-growing

and potential customers within each region by

emerging economies.

industry type.

However, in the chemical industry—as in a

Once the micromarket segments are defined,

number of other industries—some companies are

these companies evaluate the growth potential of

starting to show impressive results from a new

each micromarket—both with regard to the level

approach that turns these shortcomings around.

of penetration the company has already achieved

In chemicals, companies that operate in highly

and the additional share that it can aspire to

fragmented specialty markets comprising large

capture—and of the market’s underlying growth

numbers of customer niches have been

or lack thereof. This can provide surprises. For

particularly successful using this approach.

example, one chemical and services company with

48

McKinsey on Chemicals Winter 2011

a 20 percent share of the overall market dis-

continent. To avoid becoming bogged down

covered it had share as high as 60 percent in some

in the complexity of handling numerous micro-

markets, while in others, including the fastest-

markets, successful companies combine micro-

growing market, its share was as low as 10 percent.

markets with similar characteristics (including

Companies also assess the competitive dynamics

growth opportunities) into a much reduced

in the micromarket, such as the number of

and manageable number of “peer groups,” and

competitors and whether pricing in the

then define a strategy for each peer group. In

market tends toward value-based practices or is

most chemical sectors, that number is no more

just aggressively cost-based (Exhibit 1).

than 8 to 10 peer groups in each of a company’s main regions.

McKinsey on Chemicals 2010
A typical micromarket-definition exercise

M3 generate dozens of micromarkets—or even can Exhibit if the company considers an entire hundreds1 of 3

Exhibit 1

For example, a company specializing in inputs for the agricultural sector (including crop-

Companies can use internal and external customer data to assess current performance and identify attractive micromarkets.
The attractiveness of growth areas becomes more nuanced when examined at the level of micromarket data

Market penetration
%

Market size
$ million
40
10

20

20

50

40
22

15

5

Competitive-intensity index
100 = bad

Growth
%
7

6
2

A

35

B

3

C

73
2

D

Micromarkets

Source: Disguised client data; McKinsey analysis

22

E

A

36

B

52
28

C

D

Micromarkets

E

Kick-starting organic growth

49

McKinsey on Chemicals 2010
M3
Exhibit 2 of 3

Exhibit 2

Define peer groups and assign strategies for the micromarkets making up each peer group.
Gross margin relative to operating expenditure, $
Micromarket

5.0
Approach
• Set

micromarket productivity goals based on peer-group average
• Reallocate investment to focus on markets with high potential

2. Maintain

4.5

1. Invest to grow

4.0
3.5
3.0
3. Monitor investment 4. Overstaffed

2.5
2.0
1.5

0

5

10

15

Peer-group strategy:
1. Invest
Invest in sales growth
2. Maintain
Improve productivity
3. Monitor investment
Ensure payoff in capturing new business
4. Overstaffed
Reduce expenses to meet average peer-group productivity 20

New-account opportunity, $ million

protection chemicals, fertilizers, and seeds)

micromarkets exercise can be translated into

aggregated its 200 micromarkets in the United

an actionable sales-development plan for the

States to 10 peer groups. These peer groups

company. As will be explained in more detail, the

were built based on the characteristics of the

peer groups can also be used to share best

farms that they were serving. Factors that

practices across the sales force and to compare

were taken into account while building these

different sales representatives’ performance.

peer groups included the size of the farms, the relative density of the farms in a geographic

Building strategies

area (for example, farms in the west were larger

The next step is for the company to develop

and more spaced out than those in the

strategies for its peer groups, which can then

east), and the type of product ordered by each

be tailored for each micromarket. In one

of the farms.

example, a chemical company grouped its 18 micromarkets into four peer groups and out-

This aggregation to a limited number of peer

lined four related strategies, including “invest,”

groups is an essential step in ensuring that the

in which the company sought to capture an

50

McKinsey on Chemicals Winter 2011

outsize share of growth, and “maintain,” in

external resources and tap into information

which the company’s strategy was to hold on to

gathered by the sales force in the field. This keeps

its market share while maximizing operating

the company’s information on growth prospects

efficiencies (Exhibit 2).

fresh—and hopefully ahead of its competitors’ insights. With this enhanced resource in hand,

Developing the strategic plan involves taking

the company made a scan of potential hospital

into account which micromarkets to focus on based

client prospects, analyzing details down to the

on growth potential and defining how to capture

number of beds in every hospital across a

the potential and to meet or exceed market

country market.

growth. This results in a detailed plan that covers sales-force allocation and in-market capabilities,

Adding the sales-force-effectiveness

performance goals related to capturing new

dimension

business and retaining old business, briefings to

The next step is to ensure that the sales force

the sales force on how to approach new types of

is allocated and provided with incentives

clients, pricing, and an implementation program.

in ways that are aligned with the strategies

District managers translate the strategy into

accurate view of the performance and capabilities

developed for the micromarkets. Having an specific tactics for sales reps to use: for instance,

of the sales force enables the company to act

identifying which accounts to pursue and how

effectively on the leads created by the new

much time should be allocated to each. A com-

micromarket data, so that it can match the best

pany’s pricing policy should reflect micro-

salespeople with the best opportunities.

market opportunities, as well as the customer life-cycle stage and purchase histories that

Some best-practice companies monitor how much

predominate in the micromarket. In addition,

time each salesperson has been spending with

marketing strategies should be sufficiently

each account and conduct a “skill/will” assess-

tailored to provide a distinctive product or service

ment of all sales and service reps, including their

suited to the traits of a given micromarket. For

account conversion and retention performance. In

one chemical company, adopting this peer-group

one company, district managers completed

and micromarket-strategy approach resulted in

evaluations to assess each rep’s skill and will for

a tenfold increase in prospects—identified po-

new-business sales. Coupled with prior perform-

tential opportunities—in some micromarkets and

ance data (including new-account growth,

a narrowing down of realistic prospects in

retention rates, and so on), this evaluation was

others (Exhibit 3).

used to identify the role on the sales force that each sales rep should be assigned to. The chemical

A key piece of the strategy is undertaking

company evaluated each of its 3,000 sales and

detailed research on the best prospects in the

service reps worldwide.

prioritized sectors. One specialty-chemical company redeployed some sales-force resources

Companies can then use the new understanding

to create positions for market-prospect re-

of each micromarket’s relative opportunity

searchers. These individuals scan data from

in combination with each rep’s skill set to re-

Kick-starting organic growth

51

McKinsey on Chemicals 2010
M3
Exhibit 3 of 3

Exhibit 3

Companies should develop a comprehensive view of tangible customer opportunities within each micromarket.

Apply a robust process to identify and prioritize opportunities in each micromarket …

… and significantly increase the world of opportunities for reps to pursue
In current client database
Newly identified opportunities

• Investigate

Total identified market any account site that purchases the client's products
• Search more than 50 global and local databases
• Identify more than 5,000 accounts per microdistrict across 65 industries
• Identify exact locations and calculate value per account

Industry

A

0.64

0.02

B

0.62

0.27

0.60

C

Relevant opportunities • Examine

opportunities the client is interested in approaching in the midterm but currently lacks the capabilities to address

Current sales $ million

Target opportunities $ million

0.33

D

0.00
0.00

E

0.27

0.15

F

0.27

0.00

0.20

G

0.02

H

Accessible opportunities 0.14

0.00

J opportunities where the client has the right offering but economics do not justify immediate pursuit (eg, small accounts, low-margin accounts)

0.00

I
• Identify

0.15

0.12

0.03

K

0.11

0.04

L

0.10

0.13

M
N

Total
Target
opportunities

• Target

opportunities that are an immediate priority and will be assigned to specific sales reps

Source: Client financials; external trade publications

0.07
0.02

0.01
0.00

Current sales: 0.67
Opportunities in database: 0.88
Newly identified opportunities: 2.76

52

McKinsey on Chemicals Winter 2011

One company not only doubled its rate of growth over an 18-month period but also reduced costs 5 percent, since it was able to deploy its sales force more efficiently

allocate sales resources. This should result in reps

levels (or “bands”) and calculate average market

skilled at gaining new accounts (“hunters”)

share to understand the point of diminishing

spending their time aligned with the opportunity

returns. These data were then used to set as-

for generating new business, while reps skilled

pirations. For each micromarket, the client made

at maintaining existing business (“farmers”)

an explicit decision on whether it wanted to get

concentrate on those accounts. This approach

the most possible share points from added

improves sales growth and reduces waste of

coverage or only increase coverage where “bang

sales resources. At one company, the analysis

for the buck” was the largest.

showed a top-performing “hunter” was traveling
200 miles and spending 55 percent of his time

Successful companies have also established

in an area where it now appeared that only

improved performance-management systems.

25 percent of the opportunity existed. His work-

These include defining new pricing and

plan was reorganized and his home base was

service guidelines across accounts to ensure that

moved so that he was traveling only 50 miles and

all accounts are held to a minimum level

spending 75 percent of his time in an area where

of profitability. With regard to sales-force per-

75 percent of the opportunity existed.

formance, best-practice companies have

The company also developed customized pricing

the newly identified growth opportunities

created incentives for the sales force to pursue and sales tools that could be adjusted depending

and to look out for new growth opportunities.

on strategy. As a result, new customers in an

They do this by evaluating the sales reps on

“aggressive growth” micromarket received lower

leading indicators, such as how often they call

prices than customers targeted for service

prospective customers and top-performing

renewals in “moderate growth” micromarkets.

“hunter” reps’ increases in sales time, and on lagging indicators, such as new-account

In another example, the agricultural-chemical

generation and sales growth.

company conducted a detailed analysis that plotted market share against sales coverage. This

Again, the peer-group structure can play a valu-

analysis helped the company identify coverage

able role here. Companies can measure per-

Kick-starting organic growth

formance within peer groups of similar micro-

53

reps to accounts in close proximity, as well as

markets, replacing the typical practice of

changing time allocations to focus on more

simply evaluating an individual market’s and

profitable accounts and more sales (rather than

salesperson’s performance against a set of key

service) activities.

performance indicators. This approach makes it easier to spot major performance gaps and to

Impact

validate hypotheses about the effectiveness

Using this approach, one chemical company

of micromarket strategies and changing market

doubled its rate of growth over an 18-month

conditions. In addition, the peer-group perspec-

period while maintaining upward price momen-

tive can be used to share best practices across

tum. It did this primarily by identifying its largest

the sales force and to compare different sales

opportunities and then assigning sales reps to

representatives’ performance.

capture them. The growth rate achieved was three times higher than that of the underlying

Building the supporting organization to

market, which mirrored the region’s GDP growth.

drive and sustain the change

The company also reduced costs by 5 percent,

In the third phase, successful companies build up

since it was able to deploy its sales force more

the commercial capabilities required to execute

efficiently, giving top sales reps more time for

their micromarket strategies. When assigning roles

face-to-face selling instead of servicing accounts.

and responsibilities, we have observed that companies tend to standardize some duties but

Another chemical company turned around a

also allow for a degree of modification across

decade of market-share losses after implementing

micromarkets.

this approach. The client had lost a point or more of market share for 10 successive years and

In addition, the need to build up certain capa-

failed to capitalize on a booming market.

bilities to be able to pursue micromarket

After launching this effort, the client was able to

opportunities is often recognized when pursuing

hold market share steady for the first year;

this approach. Rather than adding overhead

it has increased share by two to three points

to build capabilities, best-practice companies re-

annually for each of the past three years.

allocate resources. One specialty-chemical company shifted staffing allocations from lower-

This approach has had significant impact in

priority sales territories to set up a new sales-

industries beyond chemicals as well. A large

operations group to monitor its progress in each

air-cargo operator was able to double the share of

of its regions (Americas, Europe/Africa/the

wallet from key strategic customers along

Middle East, and Asia-Pacific). It also put in

targeted trade lanes by following this approach.

place a marketing analyst to identify and track

Similarly, a logistics player was able to grow

opportunities across one region and added a

volume and price simultaneously, increasing

second analyst to prepare financial tools for

revenues by 3 percent. In another case, a leading

real-time decision making in each micromarket.

Asian mobile operator whose annual revenue

This included building maps and assigning

growth had declined by 50 percent over two years

54

McKinsey on Chemicals Winter 2011

used the approach and is now on track to realize

The approach outlined in this article makes it

revenue growth of 5 percent.

possible for companies to generate new market insights by combining granular micromarket

To support companies in the initiatives described

data on growth prospects with specific and

above, we have developed a framework and a

actionable steps that the sales force must follow.

number of tools, which are available as the M3

Chemical companies that have adopted the

approach. The M3 offering includes templates that

approach have seen impressive organic-growth

can be used in micromarket analyses, frameworks

improvements. Consider the alternatives: M&A

for aggregating micromarkets into peer groups,

has a high failure rate. Expanding in emerging

and a number of sales-support tools.

markets is expensive and requires extensive new skills, while innovation—though a well-tested route to growth in chemicals—takes time and luck. Given all that, chemical-industry seniormanagement teams should look carefully at organic growth as a route to building their businesses and improving returns to shareholders.
They should also bear in mind that if they are not paying sufficient attention to and defending their core business, they may well lose it to a competitor—one that is willing to invest the time and effort necessary to build it up.

Maximilian Coqui (Maximilian_Coqui@McKinsey.com) is an associate principal in McKinsey’s Munich office,
Manish Goyal (Manish_Goyal@McKinsey.com) is an associate principal in the Dallas office, Jason Grapski (Jason_
Grapski@McKinsey.com) is a principal in the Southern California office, and Soenke Lehmitz (Soenke_Lehmitz@
McKinsey.com) is a principal in the Berlin office.

February 2011
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