A strategy to help chemical companies increase profits

Most chemical companies are trying to cope with the problem of increasing commercialization. Rethinking the business model helps to protect profit margins.

Chemical enterprises are facing an increasingly severe environment because the growing sectors in the industry are becoming more and more commercialized. Companies have been trying to reduce operating costs to help offset this trend, but they pay less attention to marketing and sales as spending continues to rise in both areas. The business operation mode of many companies is mature and needs to be reconsidered to help maintain or improve the profit margin. However, this is not a problem that the marketing and sales departments can solve. This is a strategic issue that requires the intervention of the company's leadership, but it has proved difficult for many enterprises to take measures in this direction. Based on our experience in the industry, we offer this article as a starting point to help the leaders of chemical enterprises take action.

In the past 20 years, the increasingly harsh environment has eroded most of the global chemical industry. Of course, since 2000, the industry has performed well in the capital market, and some industries have made high profits by virtue of their advantageous natural gas raw materials. However, for most manufacturers, the product line has become more comprehensive commercialization, which has squeezed the profit margin.

The company has mobilized to offset this trend and cut costs by improving operational performance. But sales and marketing have not been affected to a large extent. Our research shows that business costs have increased instead.

An analysis of the world's 50 leading chemical companies found that the proportion of average sales, general and administrative (SG & A) costs to revenue increased by 10 percentage points from 13.4% to 14.4% during 2004-2014. We observed a similar pattern in the evolution of sales and management expenses relative to gross profit.

What's going on? It seems that while their colleagues have been adopting a streamlined operation mode, the business department is implementing traditional marketing and sales methods, and even increasing their expenses. The commercialization trend and new opportunities brought by digital technology give chemical enterprises the opportunity to take the offensive and rethink their marketing and sales operation mode.

Let's review why there is more commoditization. The production technology of chemicals has become more extensive, and the capacity is also increasing rapidly, especially in emerging markets. Different from traditional chemical producers, "hand in hand" carries out a different type of cooperation with customers. Traditional chemical producers would have developed a chemical to meet the needs of their customers: instead, the product was sold at a price.

Despite the integration of the more mature Western markets, the number of chemical producers has also increased. The surge of manufacturers tends to encourage the increase of production capacity, which exceeds the growth of the market and depresses the price and profit margin. The development of polyethylene terephthalate (PET) is a good example. It has developed from a special chemical to a commodity in less than 15 years.

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