Monitor Generating Value Chemicals

Generating Economic
Value in Chemicals
Possibility or Illusion?
monitor group
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Contents
I. Foreword and Executive Summary ............................................... p. 5
II. The Need for New Levers to Create Value.................................. p. 9
III. Lever 1: Recasting Innovation Management ........................... p. 15
IV. Lever 2: Targeting Customers Better ........................................ p. 25
V. Lever 3: Pricing for Value and Profit .......................................... p. 33
VI. Lever 4: Branding for Results and Premium Margins ........ p. 41
VII. Beyond the Customer: Managing Industry Dynamics ......... p. 49

I. Foreword and Executive Summary
For years, the chemicals industry has had to face deteriorating profitability and The chemicals industry
has therefore generated very little economic value (see Chapter 2). The industry needs fundamental
improvements to restore
has been very aware of this trend and has, in response, used various approaches profitability
to try to improve the situation. A strong focus on costs, especially in manufac-
turing, has been complemented by M&A activities, with the objective of either
consolidating the industry or achieving backward, i.e. raw material, integration.
At the same time, as compared to the already difficult commodities situation, a
growing number of specialty chemicals producers have faced increasing com-
petition, downward pressure on prices, and diminishing margins. These are
typical symptoms of an impending “commoditization” of their products.
Unfortunately, the strategies used so far have not resulted in the improvements
hoped for. In this study, we present the results of a survey we recently conduct-
ed and propose new approaches to value generation in the chemicals industry in
order to decelerate and, where possible, reverse the negative trends described
above. Here, we focus on a number of levers which the chemicals industry has
not paid enough attention to thus far (see Exhibit 1).
Exhibit 1: Illustrative Value Drivers in the Chemicals Industry
Source: Monitor Estimate
As our survey reveals, the chemicals industry – compared to other B2B sectors
– pays too little attention to differentiation. Differentiation can not only be
achieved through R&D or new products, but also via the company presenting
MONITOR GROUP 5
itself to customers in innovative ways, i.e. through customer targeting, market-

ing, focused value propositions, pricing, and branding. This study therefore
focuses on new ways of looking at innovation and differentiation.
Innovation (Chapter 3):

The intense and very competitive quest for product innovation has generally
neither yielded the breakthrough results hoped for nor contained or reversed
the ongoing commoditization. The industry’s approach to innovation should be
changed in three ways:
• Companies should take a more comprehensive view of innovation and

apply the concept across the entire organization, not just in R&D
• Companies should formulate an explicit innovation strategy in order to
provide overall direction, inspiration, and focus
• Companies should make more adequate use of R&D and innovation
management tools
Customer Targeting (Chapter 4):

Companies throughout the industry are highly proficient in interacting with
their individual customers, but have difficulties serving the sum of customers,
i.e. the market, in a profitable way. Companies need to learn to leverage their
efforts and costs better by targeting the specific needs of entire customer seg-
ments, not only individual customers, as it is unlikely that any one customer
can sustain all the investments required to serve it in an optimal way.
• Companies should divide their markets into meaningful and action-

able segments, i.e. into segments that define differing behaviors and
needs, and which can be targeted separately and specifically by the orga-
nization
• Specific value propositions must be developed according to these pref-
erences and needs in order to serve each customer group in a targeted
way
• The industry as a whole must become more customer driven in order to
create more value
Pricing (Chapter 5):

Pricing is an important topic for the industry. Not only has highly aggressive
pricing driven down profitability, also, many companies have not even man-
aged to create value for themselves in the way they set their prices.
• Companies need to act in recognition of the importance of pricing as a

key value generator for themselves and their entire industry
6 MONITOR GROUP
• Consistent and value-generating pricing requires the definition of an

underlying rational, dynamic pricing strategy
• Simplistic pricing tools that are driven more by cost than by value should
be replaced or augmented with more sophisticated pricing tools as
applied in most other industries
Branding (Chapter 6):

The chemicals industry attaches little importance to product and corporate
brands and the associated positioning of the respective product or company.
This neglect is risky given the importance brands and associations have for cus-
tomers in choosing their business partners. A brand summarizes the company’s
value proposition and the desired attributes that will define the company. As
such, a brand will provide trust, guidance, and a purchasing criterion for cus-
tomers. This is especially important for customer relationships in the chemicals
industry where the products or solutions sold are often critical components of
the purchasing company’s value chain.
• Companies need to proactively build their brand(s)

• Consistency needs to be established between the intended strategy, posi-
tioning, the brand, and the company’s capabilities
• As a brand is built on what we do, not on what we say we do, the entire
organization must be enabled to deliver an “on-brand” customer
experience
• Branding, correctly applied, improves the bottom-line and is not the
esoteric PR exercise it is commonly mistaken for
These four levers all have the same objective: to help companies differentiate
in the eyes of their customers, thereby escaping the trap of commoditization.
As a result, companies are able to demand higher prices for their products and
solutions based on a sound understanding of their products’ value contribution.
In addition to looking at the relationships between customers and companies,
the overall competitive environment should be influenced actively. Active and
conscious management of industry dynamics (within the bounds of anti-trust
legislation) could significantly increase the size of the available profit pools in
the various industry segments (Chapter 7).
It is crucial to begin learning to shift value from customers and customers’

customers to the industry and then to individual chemical firm. Unless a new
mindset around customers, differentiation, and competition emerges, the
industry will not manage to return to long-term positive value creation.
MONITOR GROUP 7
8 MONITOR GROUP
II. The Need for New Levers to Create Value
Very few players inside or outside the chemicals industry would argue that Economic profit generation
the industry is in a good state. Figures underline this assumption. The indus- in the chemicals industry is
low and deteriorating
try failed to generate significant economic value over the last five years1 (see
Exhibit 2). Moreover, shareholder returns over the last five years have been
far below what has been reached in other basic industries (see Exhibit 3). In
order to learn more about the industry’s view on value creation, the tools and
processes used by the companies, and their assessment of their own capabili-
ties, we recently conducted a survey among 40 European chemicals companies
active in the areas of commodities, specialties, and fine chemicals. Throughout
this study, we will use the results of this survey to describe current beliefs and
activities in the industry.
Exhibit 2: Economic Profit Spread of the European Chemicals Industry,

1997 – 2003
Note: Industry classification based on primary SIC with 52 companies in the sample; pharmaceutical preparations excluded
Source: Global Vantage, Bloomberg, Barra, Monitor Analysis
MONITOR GROUP 9
1 In 2003, the 52 European chemicals companies, for which data is publicly available, were on average not able to achieve
returns above their cost of capital. With an economic profit spread of -0.25 percent, the industry even offset half of the small
value creation that had happened in the previous year with an economic profit spread of +0.5 percent. During the seven years
from 1997 to 2003, these 52 companies together have generated an average annual economic profit of only 178 million Euros,
with an average invested capital of 184 billion Euros.
Exhibit 3: Profitability in Basic Industries, 1998-2003/1999-2004
1Top 10 companies by market capitalization, weighted, Apr 04

Source: Morningstar.com
Nevertheless, Despite their low value generation, chemicals companies seem to be very con-
chemicals companies are fident of their own capabilities. In our survey we found that a staggering 65
very confident of their
own capabilities
percent of the respondents, when asked to compare their own performance with
a self-chosen industry benchmark, judged their own company’s performance as
“very good” or even “as good as the industry benchmark’s” (see Exhibit 4). In
view of these results, it is difficult to believe that a deep sense of urgency exists
to improve the status quo of the industry.
Exhibit 4: Companies’ Average Self-Ratings Relative to Benchmark Competitors

(Survey Results)
Note: Industry benchmark = 10; self rating on a scale from 1 to 10

Source: Monitor Survey
10 MONITOR GROUP
What are the reasons for this obvious discrepancy in perceived capabilities and
measurable results? There are two possible explanations. First, there may be
areas of weakness that the companies are actually aware of, but which remain
weak and which have a large impact on returns. Second, there may be areas
which are so far “off the companies’ radar screens” that shortcomings are not
even noticed. Both explanations will prove to be correct.
Within the generally very high rankings, three processes stand out as receiv- Companies are aware of
ing somewhat lower marks: innovation management, managing inventions via relative shortcomings in
innovation and pricing
trademark creation, and pricing (see Exhibit 5). Here, the first two levers for
increasing profitability become apparent: managing innovation and pricing.
Exhibit 5: Companies’ Average Self-Ratings Regarding Specific Processes

(Survey Results)
1Preciseaverage = 8.01
As we examined the industry’s perception of important value creators, cost The industry’s evaluation
management and product innovation were deemed more important whereas of value creators reveals
the hidden gaps: customer
pricing, positioning and differentiation (i.e. branding and customer target- targeting and branding
ing) were considered less important (see Exhibit 6). While it is true that cost
reduction and product innovation have been used extensively and, in part, very
profitably in the past, they seem to have ceased generating much additional
value. Unfortunately, the industry has not yet started successfully focusing on
the additional levers, which might be able to make up for diminishing returns
on investments of the tactical ones. The lack of focus on differentiation is
MONITOR GROUP 11
also evident in the companies’ very similar positioning. Little differentiation

exists even at the strategic level: Most of the “highlights” communicated to the
market are identical for more than 60 percent of the companies analyzed (see
Exhibit 7).
Exhibit 6: Relative Importance of Value Creators (Survey Results)
1 e.g. through
customer targeting (incl. market segmentation, better customer understanding, streamlining of offerings),
and branding
Exhibit 7: Publicly Communicated Strategies of 17 Large Chemicals Companies
1 Industryconsolidation, vertical integration, complemenation of portfolio, etc.

Source: Analysis of annual reports 2002
12 MONITOR GROUP
The Need for New Levers to Create Value
So far, most chemicals companies are battling for customers and market shares
in the same (overcrowded) space with the obvious consequences for prices
and profitability. These companies have not yet learned to differentiate their
offerings via the way they understand and target their customers, through
developing differentiated and value-adding offerings, and by building their
brands. The industry is bound to protest against this statement. Nonetheless,
if brands were strong, if customers were targeted well, if segmentation worked,
more differentiation would exist with reduced commoditization and price ero-
sion. Hence, the other two levers required to address lacking profitability are
customer targeting and branding.
We believe that the chemicals industry players will not return to long-term It is time to utilize new
positive value creation unless they embrace a new approach to innovation man- levers for value creation in
the industry
agement, customer targeting (addressing customers’ and customers’ customers’
needs more closely), pricing, and branding. A pure focus on the traditional stra-
tegic domains of the chemicals industry — customer relationship management,
product invention, M&A, and cost reduction — is unlikely to fully address the
value creation gap.
MONITOR GROUP 13
14 MONITOR GROUP
III. Lever 1: Recasting Innovation Management
Innovation is crucial for any company. In Monitor’s 2003 survey on innovation Three causes for
in the UK, executives called innovation “the life blood of our company” and stat- unsatisfactory R&D results
ed, “Innovation is about wealth creation – that’s our only mission”. Innovation
is regarded as a crucial prerequisite for success in the chemicals industry as
well, as became clear again in our recent survey (see above, Exhibit 6). At the
same time, we found the companies to be dissatisfied with their proficiency in
innovation management (see above, Exhibit 5). The intense, very competitive
quest for product invention over the last decades – meant to reverse the down-
ward trend in profitability and ROI – has yielded mostly disappointing results.
There are three root causes for this lack of success:
1. a failure to seek innovation across the entire business rather than in R&D
only
2. the lack of innovation strategy leading the organization to focus on incre-
mental change
3. inadequate knowledge about, and disciplined use of R&D & Innovation
management tools.
When addressing innovation and its impact on growth, most companies think Innovation management in
only of R&D. This narrow focus has two consequences. First, the R&D organiza- chemicals is often reduced
to R&D management
tion is viewed as the exclusive source of innovation, which means that marketing
– representing customer needs and market requirements – is most often not
integrated sufficiently in the development process. As a result, new develop-
ments often do not meet the most urgent customer needs and may not find a
demand large enough to recover the investment. Furthermore, the organization
as a whole will not easily adapt the innovations and enthusiastically support
commercialization. Second, innovation efforts are focused almost exclusively
on technology and products. Why should innovation be limited to the resource
devoted to R&D, which is typically three percent of sales, instead of applying it
to the entire 90 plus percent of COGS and expenses? More broadly it means that
all other functions in the organization have a diminished role in innovation.
Clearly a major potential source of innovation is eliminated by this relegation.
Therefore, the concept of innovation needs to be extended to embrace the way
a company does business across the entire organization, so that all possible
aspects can be used to develop and extract maximum value from the market.
Viewed in this way, improved customer insights, more fitting value propositions,
improved business models, new distribution channels or financial competencies
should be just as much a focus of innovation and can contribute as much to gen-
erating value as the “classic” innovation area, R&D.
MONITOR GROUP 15
Innovation management Partially due to the recent economic downturn, pressure on margins, and
is “incremental” and increased scrutiny from shareholders and financial markets, chemicals compa-
lacks overall strategy
nies are devoting an increasingly large share of their resources to research in
known and familiar, but crowded and therefore potentially highly competitive
areas. In addition, the industry continues to mature and management accepts
the inevitable by moving towards a risk-averse company culture – both on the
“vision”-level and in daily work and management. In the absence of a coher-
ent innovation strategy that would provide overall direction, inspiration, and
resources, any activities beyond the well-known territories will continue to be
perceived as an “ill-disciplined, unfocused accumulation of research projects”
which causes costs rather than as an investment in the future.
Innovation management Neither basic nor more sophisticated tools of innovation management seem to
tools are not be known, accepted and used sufficiently by the majority of the chemicals indus-
used sufficiently
try (see Exhibit 8). Our survey revealed that only 40 percent of the surveyed
companies have a structured process to identify development opportunities,
less than a third actively manage and enhance the value of their R&D project
portfolio, only slightly more than a quarter do structured post-R&D investment
reviews, less than a quarter have an active feedback loop with marketing and
sales, and less than one in seven companies apply the basic concept of product
life cycle management.
Exhibit 8: Use of Tools Regarding R&D and Innovation (Survey Results)
1 e.g. real
options
16 MONITOR GROUP
Managing innovation well is a daunting task. Direction and focus need to be The “Innovation Diamond”
provided, capabilities and resources built and managed, resources assigned, shows the seven facets of
increased innovativeness
timelines managed and market insights incorporated. To increase the innova-
tiveness of an organization and to address the three shortcomings mentioned
earlier in this chapter, many chemicals companies already use concepts such
as platforms, partnering, or the establishment of knowledge networks with
significant success. However, very few companies so far use the overarching
framework to address all relevant parameters in a coordinated way. There are
seven interdependent facets (see Exhibit 9) that need to be managed in an
integrated fashion in order to reap optimal benefits and reach a world-class
position in innovation. For a more detailed description of the diamond and its
components, please refer to the section “The Innovation Diamond” at the end
of this chapter.
Exhibit 9: The Innovation Diamond – a State of the Art Framework for

Managing Innovation
Unlocking the value from innovation requires chemicals companies to rethink Chemicals companies must
their operating philosophy and build the systems, management culture and unlock value by being truly
innovative
capabilities required to create the value-generating innovations relevant to
their end markets. More specifically, this means:
• Get the basics right, use the appropriate innovation management tools
in an effective way (see above, Exhibit 8), establish the appropriate orga-
nization and company culture, develop appropriate metrics and set the
right incentives.
• Re-invent what innovation means, not only technology, product, and
process innovation, but also innovation in the customer interface such as
differentiation, branding, marketing, customer segmentation, customer
targeting, etc.
MONITOR GROUP 17
• Develop a coherent innovation strategy and reprioritize invest-

ments accordingly with less focus on incrementalism and more on next
generation concepts and platforms.
• Be dogmatic about linking R&D to customers’ and customers’ cus-
tomers’ evolving needs.
• Think about the generation of the highest value as embodied in
the “Innovation Diamond”: use platforms, partnerships, and networks;
pull together the necessary resources, competencies, and know how; gen-
erate insights on customers needs, how competitors fulfill them, and
what can be done earlier rather than later to generate additional value;
establish good innovation processes/pipelines and allocate resources
appropriately while actively managing innovation portfolios to discard
value-destroying projects.
Benchmark against best-in-class
• For all innovation projects completed in the last five years, we know their
incremental value to the company.
• We rely heavily on platforms, external partners, and networks to accelerate
development and commercialization.
• We define and manage innovation at all levels; R&D, business models,
serving the customer, etc.
• We have understood better than our peers to turn customer problems/
issues into premium-price solutions.
18 MONITOR GROUP
THE INNOVATION DIAMOND
The following parameters or facets need to be managed in an integrated

fashion in order to reap optimal benefits and reach a world-class position in
innovation:
Facet 1: Use and management of portfolios must be expanded

Traditionally, the chemicals industry has been good at thinking along R&D
portfolios. However, the portfolio concept is usually limited to R&D projects,
and where portfolios exist, they are usually not managed sufficiently (see above,
Exhibit 8). A more diverse and compelling array of innovation topics within
the business portfolio is needed. This is directly related to a broader and stra-
tegic view of innovation, as is the case with the other facets of the diamond as
well. From a strategic viewpoint, portfolios of innovations (wherever they are
in the organization), R&D and business development projects, corporate devel-
opment opportunities as well as competencies, partners, products, markets,
processes, services, and ideas can and should be defined and managed. The
involvement of growth platforms, partners, networks, and customer insights
help significantly in establishing and managing these portfolios to increase the
growth and value potential of the organization.
A multitude of relevant parameters should be used to assess and manage these

portfolios. Useful and applicable parameters show the tradeoffs inherent in the
corresponding decisions, e.g. time to market versus likely reward, risk/reward,
or (technical) risk versus resources required for completion. Only by using and
managing such a wide array of criteria can the right balances be found, for
instance, between incremental and break-though innovation, or in-house proj-
ects and co-operations or buying options for technology.
For example, in the stagnating agrochemicals market companies have had to

react to the decreasing number of new active chemical ingredients leading to
blockbuster products. The rise of biotechnology provided not only new techni-
cal solutions, but also new business models such as focusing on seeds instead
of chemicals. The strategic choices to make were, and are, daunting. Should
the portfolio embrace only projects based on new technology, which is the road
Monsanto followed, or alternatively complement the traditional agrochemicals
business with biotech solutions and build up a balanced portfolio with invest-
ments in both areas, the choice made by most of the other big players such as
Syngenta, Bayer and Dow Agrosciences? Such a choice must be validated by
strategic insights and can only be driven through the company via rigorous
value analysis of the portfolio of opportunities relative to one another. The jury
MONITOR GROUP 19
is still out as to who had the best market insight and the portfolio to achieve the
best returns in the long run.
Facet 2: “Platforms” are best practice to develop focus and efficien-

cy in innovation
Contemporary chemical organizations organized around business units often
do not bring together the know-how, resources, experience, financing, market
view, and business drive for market-oriented and successful innovation. Low
critical mass teams and “passionate individuals” tend to drive ideas or projects
toward often poorly evaluated opportunities. Due to lack of funding and poor
long-term market vision, these projects are often at risk of being abandoned
haphazardly.
Many organizations are now adopting a best practice where complementary

assets are brought together in “platforms”. Platforms are developed and formed
around topics that have a significant future impact on a company and its indus-
try and must be managed strategically.
Platforms are clusters of A platform is an effective way to develop and allocate all the resources, both
technologies, competencies, inside and outside the organization, in order to develop a differentiated value
and market opportunities
proposition for the customer. Platforms are allocated all necessary resources
to achieve their objectives. This may include financial resources, manpower
(including the right combination of capabilities, competencies, experience and
know-how), control over a shared asset (e.g. a plant in order to carry out test
runs for a certain number of days), intangible assets such as patents or tech-
nologies, access to the necessary decision makers and even certain customer
relationships so that joint developments or pilot tests in manufacturing, logis-
tics, marketing, or distribution can be carried out. Platforms in their ultimate
manifestation are virtual businesses, and if they prove their value to the enter-
prise, they undergo transition from monitoring mode to learning mode and
finally to business development mode.
DuPont was among the first companies to use platforms. In order to pursue
growth more actively, the company reorganized all its business activities into
five market- and technology-focused “growth platforms” in February 2002.
Focusing on electronic and communication technologies, performance materi-
als, coatings and color technologies, agriculture and nutrition, and safety and
protection, each platform has the critical mass to capitalize on strong market
positions, quality products and powerful brands. The change became necessary
when the Strategic Business Units (SBUs) introduced in 1992 were seen as too
narrowly defined to find significant growth opportunities. The broader-based
platforms represent “scientific platforms around market opportunities,” says
20 MONITOR GROUP
DuPont chairman and CEO Charles Holliday2, and enable Dupont to bring
together their technology and offerings in new and innovative ways which were
not previously possible.
Facet 3: Partnerships provide complementary competencies,

insights, etc.
Some crucial ingredients to driving innovation may just not be available within
one company. In such a situation, partnerships can and should be used to close
gaps and better leverage in-house competencies.
Partnerships can vary in depth, from “reactive partnerships”, established ad hoc

and in response to certain events, to “innovative partnerships” that are at the
heart of the respective partners’ strategies. The latter lead to intimate collabora-
tion throughout the two organizations, and often include joint investments for
shared products, capabilities and markets. The depth of partnership best suited
to a certain opportunity depends on its relevance for the participating compa-
nies. For example, for a polymer company, the external provider of packaging
c ag g
innovvative
material can be a close strategic partner for the development of innovative
ed.. This
materials and the efficient processes by which they can be produced. Th kind
ki
part
p artn
tnership,
ers
rshh where
of situation probably thrives best with a strategic innovative partnership, ree
fica crucial
both partners would commit to the application of significant uc resources
uci
uc resourc
ourcess
pen tion and the busi-
over the longer term to ensure successful market penetration b
nd corresponding
ness result. The more important the objectives and nding
din
in
ng capabilities
capabilitie
il ties
es
de to be able to
become, the deeper partnerships need to be in order o drive
drriv
iv forward
d
le areas of innovation.
the entire business(es) into otherwise inaccessible tion.
on
n.
n.
o thee often
The concept of partnering is contrary to often encountered
encoun H (nott
NIH
repr
invented here)-syndrome. Partnership commitment represents ganiza--
an organiza-
d maximize a busi-
tional openness towards external influences to advance and
ns
ness opportunity. Consider Degussa, which has a long history of acquisitions
and divestments. Due to these frequent changes, the company had to get used
to repeatedly establishing deep working relationships with new entities, be it
newly acquired units or freshly spun-off companies. These experiences cre-
ated a very open company culture and a partnering attitude towards internal
and external partners. In this case, no company directive or overall strategic
decision existed. It was the establishment of an open culture that enabled the
company to draw the best out of its various resources. The pharmaceuticals
industry shows the way in not relying on internal innovation alone. Pfizer, for
instance, currently has over 50 technology joint ventures.
MONITOR GROUP 21
2 UMI, Chemical Week, December 18, 2002
Facet 4: Networks enable the exchange of knowledge within and

across company boundaries
The form of organization plays an important role in fostering innovation.
Traditional silo-like organizations inhibit the flow of insights, know-how, resourc-
es, and therefore innovation. More modern forms of organization, e.g. matrices,
have started to overcome these traditional disadvantages. As a further step in that
direction, networks allow the free exchange of information in the organization.
Platforms, on the other hand, are a way of bringing together the “ingredients”
necessary to drive forward a specific, already identified opportunity. Networks
are an organizational principle linking their members via widespread, point-
to-point and direct communication rather than via the hierarchical information
flows often present in today’s organizations. At the core of these networks is a
voluntary association based on mutual potential benefit, steered not by organiza-
tion design or formal systems, but by healthy self-interest.
Networks need not stop at company boundaries and can make use of exter-
nal resources such as universities, business partners or industry associations.
Consider Degussa’s description of its nanomaterials project house3, into which
it integrates external resources via a network approach. “Degussa is working
with nine German university institutes. The universities provide state-of-the-
art measuring technology and the results of their basic research, which they can
then test… in Degussa’s pilot plants. Thus, Degussa... can (capture the greater
richness of nanomaterials and deduce its practicality at an early stage to)
greatly reduce the developmental times for tailor-made nanomaterials.”
Facet 5: A good innovation pipeline provides high value capturing

Another lever for amplifying innovation is the active management of innovation
pipelines. The quality of an innovation pipeline is not only defined by the speed
with which ideas are brought from inception to commercialization, but also by
the value captured. A state-of-the-art innovation pipeline is characterized by
four attributes (see Exhibit 10).
Exhibit 10: State-of-the-Art Development Pipeline
22 MONITOR GROUP
3 Degussa’s way of implementing platforms: To provide a basis for innovation across BUs, the company runs a maximum of
three so called “project houses” that have a firm business plan and a time limit of three years. These project houses are joint
projects of various business units and are only established for ideas where a business potential of at least 50 Million Euro sales
p.a. has been identified.
First, a good pipeline possesses a “wide entry funnel”, driven by the broad and
enhanced insights gained by the concepts described above (platforms, customer
insights, partnerships, networks, etc.) (1). Second, development speed and flex-
ibility needs to be high (2). To ensure this, lead customer partnerships become
vital, as does rapid prototyping and “fast to failure or success” methodologies.
Third, the pipeline must be narrowed fast and substantially in order to concen-
trate resources on the most promising projects (3). Projects must be abandoned
as soon as they fail to pass the “gates” designed into the pipeline management
process. Lastly, the innovation and application potential of ideas under devel-
opment must be broadened (4). The cross-market view must be expanded
throughout the process, and non-core market opportunities and/or faster
access to more markets should be explored with partners or through licenses
etc. Obviously, the value of an efficient innovation pipeline is linked closely to
the other innovation concepts described earlier.
Even where the concept of pipelines is used, it often loses its effectiveness
during implementation. At times, non-uniform application of pipelinee meth-
meth
odology can confuse and render such techniques inefficient. BASF has
as avoided
avo
voided
d
these pitfalls by implementing their new innovation process globally
allyy and
a with
w
an intranet based support tool. The resulting process is relatively
ativ
tivvelyy simple
s and
nd
d
nfor ation
on
n are available
pragmatic. Tools such as forms, guidelines, and other information availab
i ablee
for the decisions)
via the intranet. In this way, the processes (and therefore d i i ) aree con-
c
nd their individual
sistent. Furthermore, portfolios can be managed and dividual
idu items
ms can
ca
kt of all relevant
be compared on a global level and are on the desktop vant
ntt managers.
managers
m s.
Facet 6: Insight into customers, competitors,

mpetitors,
tittors, a
and ma
markets is k
key to
o
successful innovation
A company’s innovations are only as good as its understanding
standin of its custom-
stom-
ers, competitors, the market and technology developments. Every interaction,
i t tion,
partnership, or network-node location should be viewed as an opportunity to
o
extend the organization’s eyes and ears to the market. However, insight is more
than the knowledge of situations and the understanding of problems and needs.
To become useful and to foster innovation, this knowledge and understanding
must be combined with possible solutions to the problems and needs encoun-
tered. Insight is then the knowledge of how to add value by having a solution to
a customer’s problem, not only by understanding the issue itself.
Consider Air Products, one of the largest suppliers of industrial gases. Over
the last 30 years, their management and their internal business development
department have been actively seeking market opportunities and have provided
insights to both the business and the technology side of the company. In gen-
MONITOR GROUP 23
erating and offering solutions to these opportunities, the company diversified

immensely and is now also active in the electronics business, low temperature
refrigeration, environmental technologies (e.g. the removal of pollutants from
heavy industry sites) and in waste/recycling technologies. The company also
integrated forward into manufacturing chemicals themselves and developed
innovative processes for the production of chemical intermediaries. This suc-
cessful diversification was only made possible by the way in which its globalized
business development brought to the surface customer and market based ideas
and married them with solutions across the business space.
Facet 7: Innovation needs an investment and growth attitude

In innovation, “investments” denotes the efficiency and effectiveness of use of
total resources – the resources available internally, the resources the company
can gain access to externally, and the investments into the innovation portfolio.
Leading innovators have started managing their property, plant and equip-
ment, human assets, intellectual property and intangible assets as fundamental
iinvestme
nvv ments
me
investments and cultivate them with a growth attitude.
One company
any
nyy that
th successfully
ucces
cessfully used wise
w investments in resources to generate
ffastt growth iss SABIC,
SAB
SA C, the
hee Saudi
Sau
audi Basic Industrial
I Corp. SABIC was established
in
n 1976
76
6 to add value to Saudi Arabia’s
Arabia’
Ar natural hydrocarbon resources and today
is amon
ong the leading global petrochemical
among p companies in terms of sales and
produ
duct
ucc diversity.
product sit
ity TThis fast asc
ascent is astonishing. SABIC’s success is based on
thee way the company
com
co nse world-class technology from the beginning. The
licensed
compa
pany became
company beca
b e xpe in pinpointing, evaluating and selecting the best
an expert
available
a va le technologies
te ogies and in negotiating hard in order to obtain the best pos-
sib term
sible ms. It managed
terms. m its licensors to provide it with updates and the best in
terms of emerging technologies. Licensors trained SABIC employees – often for
free or for a nominal fee as part of the licensing agreement – and even operated
th
the plants for the first months until operations were stable and the staff was
properly trained. Success was founded in the realization that sufficient growth
could only be achieved with external assets and by implementing the chosen
path with the necessary dedication and single-mindedness.
To round off this multi-faceted approach to innovation and achieve highest

value in the continuous rich pipeline of innovations, the appropriate culture
must be established. Success must be measured and driven by intelligently set
metrics to enable the organization to reap its full innovation potential.
24 MONITOR GROUP
IV. Lever 2: Targeting Customers Better
When it comes to interaction with its customers, the chemicals industry has a The industry treats the
mixed track record. On one hand, due to their long experience in handling key individual customer well …
customers on a personal and individual basis, the companies are very experi-
enced and successful in the areas of customer service and after sales service.
Our survey showed that various state-of-the-art tools are used by a large share
of the respondents and that satisfaction with the effectiveness of these tools is
high or very high (see Exhibit 11).
Exhibit 11: Tools Used in Customer Service and After Sales Service (Survey Results)
On the other hand, the individually-tailored, most often sales-force based treat-
ment is a very time-, resource-, and therefore cost-intensive way to serve one’s
customers. As products become increasingly commoditized, companies find
themselves in a highly competitive situation. This leads customers to demand
ever better prices or ever more specific services, both of which eat away at
margins, and suppliers have to keep up in order not to move their business
elsewhere. The companies end up in the catch-22 position of having to offer
individual service while maintaining competitive prices.
A promising way out of this situation lies in the combination of two activities. … but fails to understand
First, the customer base needs to be segmented into meaningful and servable and serve the entirety
of customers, i.e. the
segments, enabling the company to address groups of customers instead of market
MONITOR GROUP 25
individuals and thereby lower their costs of service. Second, offerings that tar-
get the needs of these various segments have to be designed so specifically that
the company achieves differentiation from its competitors. Differentiation sub-
sequently enables the company to escape the commoditization and subsequent
price pressures in the industry and thus command premium prices for their
products and services. In this context, escaping commoditization does not nec-
essarily mean offering a different product. As the product itself is always only
one component of what the customer buys – other components could be price,
level of service, delivery speed or payment conditions, brand, product range
offered, technical support, distribution channel, order size, etc. – any change
in any of the components will create a different, differentiated “product” and
channel to market, which may meet a customer group’s specific needs and may
therefore be able to extract premium margins.
For this approach to work, companies have to understand their customers’ envi-
ronments, beliefs, behavioral patterns, and needs extremely well and tailor their
offerings specifically towards selected segments. Chemicals companies have not
traditionally used this market- and marketing-based approach sufficiently.
“Traditional” customer According to our survey, the market segmentations used today are largely “tra-
segmentation rarely ditional”, based on regions, products sold, or end use (see Exhibit 12). None
provides actionable
insights of these variables generally provide real insights into customers’ behaviors
and needs (not to mention their economics), nor do they enable a company to
streamline its offerings towards specific market segments.
Exhibit 12: Tools Used in the Segmentation and Targeting of Customers

(Survey Results)
26 MONITOR GROUP
What is required instead is an innovative segmentation that aims explicitly Instead, innovative seg-
at understanding customer behavior and needs in order to identify levers for mentations are needed
that are meaningful and
fulfilling these needs. Outside the chemicals industry, many companies use actionable
innovative segmentation approaches that counter the drawbacks of traditional
techniques (see Exhibit 13). The main output of such an approach is a seg-
mentation map that defines meaningful and actionable segments by identifying
groups of customers that have similar behavior and needs within each segment.
Conversely different behavior and needs are distinguishable between the seg-
ments. For more details on innovative segmentations and their use, please refer
to the section “Effective Customer Targeting” at the end of this chapter.
Exhibit 13: Tools Used in Customer Service and After Sales Service (Survey Results)
Such an action-oriented segmentation can even be used to complement existing

segmentation frameworks. While the value proposition(s), customer targeting,
and the whole thinking around customer preferences are governed by the inno-
vative segmentation described above, existing organizational structures, e.g.
according to regions or products, may well be kept as they are.
MONITOR GROUP 27
CASE STUDY
Innovative segmentation as an inspiration for new offerings
Customer-centered Implicitly, most chemicals companies in the commodities business have adopt-
marketing can be ed a classical “ABC”-type customer segmentation. While products or regions
useful even in highly
commoditized markets may be used as segmentation criteria officially, in essence the business system
is geared towards serving large customers most efficiently. Usually, smaller
customers are jettisoned, as their size does not warrant the kind of treat-
ment applied to the large ones. Their needs can also not be fulfilled efficiently
through an average distribution and service delivery system set up for serving
large customers directly. Consequently, distributors or agents have tradition-
ally been able to capture disproportional value.
However, when analyzing and segmenting the market – including numerous

interviews with both customers and non-customers – a major European manu-
facturer of polymers discovered a previously underserved segment and a way to
serve them profitably. This segment of small customers consists of experienced
buyers of a limited product range who do not need the frills of technical services
and who value reliable products at competitive prices. With these needs, they
fit neither of the existing distribution models. They are too small to be served
directly by the producer in a profitable way, but unwilling to pay the higher
distributor prices as they do not need most of the services offered.
Instead of continuing not to serve these customers, a new business model was
designed that offered a good value proposition to the customers while enabling
the producer to serve the segment profitably. An internet-based offering of
high quality products was created to accommodate both the segment’s price
sensitivity and its need for quality. As the customers are not interested in
complex, bundled services, additional services are offered, priced and paid for
individually.
Within a few months, and despite significant skepticism within the manufac-
turer’s sales organization, the offering managed to attract numerous new cli-
ents without margin erosion. The innovative customer segmentation therefore
did not only help identify a new class of customers, it also guided the design of
an attractive offering for this new target segment.
Chemicals companies Straightforward as all this may sound, few companies actually undergo such a
need to become process to question and refocus their way of addressing the market. For most
customer-driven
organizations to suppliers, the true understanding of customer needs can only be achieved
create more value by actually going out and involving existing and would-be customers before
28 MONITOR GROUP
defining segments and thus the company’s market and marketing approach.
Ultimately, each customer wants to be catered to according to its specific
needs. Marketing and, more specifically, customer segmentation and targeting
is about understanding customer groups in such a way as to allow the seller to
provide a value proposition that serves the customer’s needs while at the same
time maximizing the seller’s profitability. No matter how important innovation,
processes and costs are for chemicals companies, they still have to learn from
other industries and become customer-driven organizations to escape com-
moditization and the resultant value destroying prized-based competition.

• We apply a segmentation methodology that reflects the behavior of cus-
tomers, enabling us to develop value propositions that allow us to extract
more value from customers and customers’ customers.
• We apply a segmentation methodology that is actionable in that we can iden-
tify the customers we want to target and the means to target them with.
• We constantly bring new innovation(s) in our channel to market.
• Our entire organization applies a common concept to describe the behav-
ior of customer segments which is then used to develop market-leading
value propositions.
Effective Customer Targeting

Targeting customers and their needs well requires several steps. Innovative A meaningful and actionable
segmentation is required to identify meaningful and actionable segments that segmentation is the basis of
customer targeting
can be addressed individually. Behavior and needs need to be understood for
each segment and attractive value propositions need to be developed for those
segments that are attractive enough for the company to be served.
Innovative segmentation is “meaningful” in that the assignment of a customer

to a segment enables the company to predict that customer’s behavior and
needs. In a subsequent step, levers need to be defined, which induce changes in
the customer’s buying behavior (definition of “behavioral objectives”) and thus
stimulate the company’s targeted growth. Additionally, in order to be able to
assign the customers to segments, the segmentation also needs to be “action-
able”, i.e. the variables need to be observable, measurable and translatable into
immediate actions. Segments that are not actionable and display little or no dif-
ference in their demographics or other practical metrics make it impossible to
actually identify the customers that belong to a segment and prevent targeting
them with practical (sales or marketing) campaigns. Thus, “good segmenta-
MONITOR GROUP 29
tion” predicts customer behavior, uses dimensions that are easily observable
and measurable, and enables the company to target individual segments sepa-
rately and specifically to unlock hidden value.
Customers’ behavior In one chemicals market, for example, customer behavior and needs were
and needs may be largely driven by their competitive position in the value chain (see Exhibit 14).
influenced by their
competitive positions Requirements of the suppliers (among others the company that carried out the
segmentation to better serve their customers) depended on three variables. The
first variable consisted of how much pressure the companies were subjected
to by their customers, and the strategies they had adopted to cope with the
situations. The second important variable was their power position towards
their suppliers, and the third variable was whether they produced intermediate
products or products for end-use.
Exhibit 14: Example of Innovative Customer Segmentation
1 e.g. due to degree of consolidation, competition, or price pressures in own, suppliers’ or customers’ industries
The “lean survivors” and the “lost generation” had the worst positions as they
were squeezed between strong suppliers and strong customers. The lean sur-
vivors, however, were still taken care of to a certain degree by their customers,
who – as professional purchasers – did not want a too unprofitable and there-
fore unstable situation to emerge in their supplying market. The lost generation,
who supplies into end markets, did not benefit from such considerations. These
fragmented consumers did not care about the situation in the supplying markets
and therefore pressure on the lost generation was enormous. While lean survi-
vors and lost generation superficially seemed to be in equally tight positions, the
“life insurance” given by their professional customers made the lean survivors a
30 MONITOR GROUP
more stable segment. Therefore, supplier relationships had a longer-term per-

spective, which in turn affected the way the segmenting company would serve
the segment.
Understanding the customers and their behavior therefore does not only
enable a company to develop appealing offerings for each customer group
(“value propositions”, see below), it also helps to distinguish between attractive
and less attractive segments from a strategic point of view, thereby directing
company and sales-force efforts in the appropriate direction. Practically, each
segment needs to be underpinned by various variables including market size
(volume, margins), channel to market, names of potential and existing custom-
ers, application, serving business unit, etc.
To target a chosen customer segment specifically, needs and behavior need to Detailed customer understand-
be understood in more detail. What is the customers’ competitive environment, ing determines the company’s
“value proposition” for
what do they believe about the market, their customers and their suppliers, a segment
what in turn are their requirements and how can a supplier help them best in
succeeding in their business? And what does the customers’ buying process look
like in this segment? Based on this understanding, the strategic positioning and
corresponding targeted value propositions need to be developed to extract
the maximum attainable value from the market. For this, standard marketing
components such as product (e.g., specific product range, quality, consistency,
or bundling), price, distribution channels, branding, positioning, and services
(e.g. delivery speed, warranties, technical service, etc.) are combined in order
to fulfill a specific segment’s needs in the best possible way.
In our example, more detailed analysis revealed that the lean survivors in the
example above had adapted quite well to their situation. The margin pressure
had led to industry consolidation and the remaining players had become highly
efficient. In order not to lose their customers, they focused on innovation and
looked to their raw material suppliers for corresponding support. However, as
innovations only bring short-term advantages – the powerful customers push
for sharing product improvements – and as this results in very little differentia-
tion potential, the players also needed to focus on cost reduction via good and
stable processes.
In this situation, besides the obvious adaptations to customer needs, there was
one additional promising way to increase the value to the customer and to the
company itself. This consisted of helping (selected, large) customers become
more profitable themselves and subsequently channel part of that additional
value on to their supplier. Two routes were followed. First, the company started
MONITOR GROUP 31
supporting the lean survivors in expanding their customer base and channeling
value from their customers to themselves, e.g. by providing new product devel-
opment support and helping expand into new geographical markets. Second,
the company worked together with lean survivors to streamline their cost posi-
tion and unlock hidden value, e.g. by rationalizing input products, conducting
efficiency audits, or working on a closer, more cost-efficient electronic order-
ing system. On an even higher level, a supplier in this position could help its
customer industry manage industry dynamics better and therefore increase the
profit pool available to the players4.
32 MONITOR GROUP
4 For more details on managing industry dynamics, please refer to Chapter 7, p.49.
V. Lever 3: Pricing for Value and Profit
According to our survey, the chemicals industry does not regard pricing as a The chemicals industry is
major value creator (see above, Exhibit 6), but nevertheless companies are not dissatisfied with its profi-
ciency in pricing
content with their proficiency in this area (see above, Exhibit 5). Their percep-
tion seems to be justified. Highly aggressive pricing, prompted by a disregard
for the importance of maintaining the industry’s profit pools – the overall value
in an industry to be distributed amongst its players – and by a pure focus on the
individual company’s profit share, has driven down the profitability situation
of the entire industry (for details see Chapter 7, Managing Industry Dynamics).
Most importantly, many companies do not manage to create value for them-
selves in the way they set their prices.
The survey showed that various methods are applied to set prices at a strategic Current pricing is fairly
level (see Exhibit 15). Also, on a more operational level, numerous forms of simplistic and driven by
cost instead of value
sales measures and direct purchase incentives such as price discounts are used
(see Exhibit 16). However, both on the strategic and on the operational level,
traditional tools outweigh new, more sophisticated methods by far. Chemicals
companies are still focusing on selling “products” at a margin above costs.
Value-in-use pricing (i.e. pricing at a level to reflect the real value to the cus-
tomer) and trade-off based pricing models are not widely applied. The industry
is also only beginning to apply sophisticated dynamic real-time pricing models
applied e.g. in the airline industry.
Exhibit 15: Tools Used in Pricing (Survey Results)

MONITOR GROUP 33
Exhibit 16: Use of Price Discounts and Sales Measures (Survey Results)
By focusing on volume and stability discounts, companies largely ignore the

lessons that could be learned from, e.g., fast moving consumer goods or the
airlines industry. There, companies focus on locking in clients via loyalty pro-
grams, stocks are managed actively using through stock clearance activities
among other things, or companies react rapidly to changes in demand (e.g.
prices vary depending on seasons, weekdays or even time of day). Even in
industrial goods more and more industries are fundamentally challenging pric-
ing protocols and practices, trying to adopt a more market oriented mindset in
their pricing policies.
The main problem is the The main pricing problem facing the chemicals industry is not the use of sim-
lack of an underlying plistic pricing tools. It originates at a more fundamental level. Most often there
pricing strategy
is no overall strategic framework that governs pricing at the corporate level.
Before a specific pricing tool can be applied sensibly, the strategic direction has
to be clear. Companies need to combine the toolbox of already existing pricing
tools within a consistent strategic framework aiming at both growing profit
share and maximizing the profit pool. To establish consistent, value generat-
ing pricing, a company therefore needs to use “strategic pricing”, i.e. design an
overall pricing strategy (interlinked with the overall strategy of the company),
derive its pricing system, and finally implement it in a stringent way. For more
details, please refer to the section “Strategic Pricing” at the end of this chapter.
Strategic pricing should Ultimately, companies do not want to be at the mercy of an anonymous mar-
put the power back in the ket to dictate their prices. Strategic pricing is therefore about maintaining
hands of the individual
suppliers
34 MONITOR GROUP
(or restoring) a healthy price level in an industry (for details see Chapter 7:
Managing Industry Dynamics) and about setting one’s own prices intelligently
within such a disciplined industry setting. In order not to lose control over
pricing, companies need to avoid cost-based, formula-linked pricing, too high
transparency in non-commodity markets, market share obsession, and head-on
price battles. Only by viewing pricing as a strategic task, and only by combining
a profit share focus with the concept of maintaining the profit pool will chemi-
cals companies be able to restore price levels to a level at which the industry will
be able to make appropriate returns again.
• Price realization and price levels are strategic issues that are managed at
board level, with significant influence on staff compensation – from the
CEO down to the account personnel at the customer interface.
• Our pricing strategy and tools allow us to set prices at the maximum cus-
tomers are willing and able to pay without any loss in value.
• Our pricing tools allow us to adjust prices and output faster than competi-
tors, allowing us to maintain the lowest stock levels and highest average
realizable prices in the industry.
• Our pricing tools are fully integrated in the value proposition for all the
chosen segments we serve.
Strategic Pricing
An integrated comprehensive pricing strategy (see Exhibit 17) gives an overall An integrated pricing
direction to a company’s pricing system. It therefore needs to answer fun- strategy is needed to
provide overall direction
damental questions about competitive and market positioning, competitive
behavior, and the company’s value proposition in its target segments.
Three sets of questions need to be addressed: First, the company needs to

define where it wants to position itself vis-à-vis its customers. For example,
is the company’s value proposition based on low prices, innovative technol-
ogy, or value-added services? Does the company define its product to be just
“chemicals” or does it want to sell product or process innovations, technological
know-how and solutions as well? Second, decisions need to be made regarding
the way the company wants to interact with its competition. Does the company
want to influence its own pricing actively, or does it want to be a pure price
taker and accept the price the market makes? If it wants to influence its pricing,
does it want to avoid or search for pricing confrontations? If it plans to avoid
MONITOR GROUP 35
confrontations, does it want to establish the company as leader or follower?

Lastly, and aligned with its value proposition, the company needs to define its
source of value generation for shareholders. Does the company focus on profit
optimization, market share optimization, or does it work with a volume/utiliza-
tion focus?
Exhibit 17: Process to Develop and Implement “Strategic Pricing”
1 e.g. value-in-use pricing, trade-off based pricing, dynamic pricing, etc.
The company needs to As for the development of a competitive value proposition, a company has to
understand the status understand and segment the customer base with a pragmatic focus on customer
quo and possible indus-
try developments needs and purchasing behavior to understand how customers may react to
changes in pricing and competitive behavior. It also needs to understand the
entire value chain dynamics linking pricing strategy to overall market strategy.
A value chain and industry structure analysis is important to identify how the
value is distributed along the value chain, how to shift it, where in the industry
there may be untapped value, and how to capture it.
In a next step, companies should use the industry understanding gained from
the analyses described above to simulate future industry developments – e.g.
by applying adequate tools such as game theory, competitor simulation, and
scenario planning, depending on the specific situation, objectives, and time
horizons – and determine their best pricing strategy vis-à-vis these future
developments.
36 MONITOR GROUP
The pricing system on an operational level is determined by the position a com- The pricing strategy guides
pany chooses in the three strategic domains of value proposition, competitive the use of the individual
pricing tools
behaviour, and value generation. A pricing system can only be designed once an
overall pricing strategy – consistent with and part of the overall strategy of the
company – is in place. Within this strategy, the single pricing tools can then be
used in a pragmatic and aligned fashion in order to maximize both the industry
profit pool and a company’s share of this pool. Some of the tools that can be
applied are exchange based pricing, dynamic pricing, value-in-use pricing, and
trade-off based pricing tools (see Exhibit 18).
Exhibit 18: Description of Various Pricing Tools
Exchange-based Value-in-use Trade-off based

Pricing tools pricing Dynamic pricing pricing pricing
Description Trading chemicals Short-term adjust- Pricing a product Attaching attributes

and their respective ment of prices to or service accord- to create “different
derivatives on an adapt demand to ing to the value to products” and pricing
exchange supply the customers them differently
Advantages Options to hedge Good to maximize Pricing beyond Pricing adapted to

and mediate risk; capacity utilization cost-based specific customer
transparent prices or to discharge approach, but dan- needs and
to steer supply overproduction ger to be underbid preferences
by competitors
Prerequisites Product specifica- Diverse and large Moderate compe- Possibility to define
tions unambiguous; customer base tition; differenti- different product
many suppliers, ated product and bundles with differ-
many buyers product benefit to ent customer benefits
customers
Best for Commodities Commodities Specialties, fine Specialties, fine

chemicals chemicals
Examples
• non-chemicals • Commodity or • Airline industry • Ulcer drug Zantac • Mobile telephony:
metal exchange rates
• chemicals • Plan of LME to • Advanced
start trading in polyolefins
plastics futures
Interestingly enough, exchange based pricing does not exist in the European Exchange based pricing
chemicals industry. As opposed to agriculture or oil for example, in chemi- and dynamic pricing can
add value in commodities
cals there is no market providing the option to hedge or execute forward or
future sales so far, but a first initiative was started by the LME (London Metal
Exchange) to begin trading in plastics futures by mid 2005. A more transaction
based, objective, and responsive pricing mechanism would help companies
react faster, thereby balancing supply and demand better. This would, in turn,
lead to a reduction in both price movements and average stock levels. Clear
MONITOR GROUP 37
messages in the form of transparent prices could help companies handle their
production capacity better, both in terms of ongoing utilization and by avoiding
over-investment in new capacity.
In the absence of a functioning market as described above, a pricing mechanism

that could be beneficial for standard products or commodities is dynamic pric-
ing, similar to what is used in the airline industry. Dynamic pricing is a tactical
tool to adapt demand to capacity and stock by adjusting prices on a short-term
basis. First, price elasticity, supply, and demand are measured dynamically.
Then forecasts about the supply-demand balance over the next few days are
made on the basis of historical data, seasonality curves etc., and the best
prices in that scenario are determined. To improve results, it may be useful to
move away from sales-force based to stochastic forecasts. This helps to avoid
systematic mistakes by replacing them by “random” ones that are on average
more correct than systematically biased ones. However, this is only possible in
markets that display a customer base diverse and large enough to use stochastic
approaches. Dynamic pricing can also discriminate between single clients and
gives the option to price differently for different customers, depending on their
individual preferences and price sensitivities.
For specialties and fine For specialties, other pricing tools should be used. Value-in-use pricing tries
chemicals value-in-use to assess the value the product or solution has for the customer and prices
and trade-off based
pricing can be useful accordingly. Here, value for the customer can mean the fraction of value in
the final product or the downside for the customer (e.g. lost production time,
quality problems, possible recalls, etc.) if the product or solution is delivered
not at all or in a lesser quality. As value-in-use pricing does not primarily rely
on production costs, a company using this tool can be underbid by competitors
fighting for market share and accepting a lower margin. Value-in-use pricing
can therefore only work where the competition is moderate, i.e. not in commodi-
ties markets, where a competitor could always supply the goods in question and
therefore undermine the company’s pricing efforts. But even in specialties, the
temptation to underbid a competitor and try to gain market share is great. This
is where the “profit pool” idea comes in again. Offering the same product or
solution at cheaper prices may shift market shares, albeit often only temporar-
ily. Ultimately, however, it will damage the entire industry by driving prices
downwards, where pockets of value could have been upheld otherwise.
One of the most famous examples of value-in-use pricing was given by the
pharmaceuticals company Glaxo. When introducing its new ulcer drug Zantac
in the early eighties, the company decided to price it a whopping 50 percent
above SmithKlineBeecham’s market leading Tagamed. Glaxo justified its pric-
38 MONITOR GROUP
ing with the fact that Zantac had significantly fewer side effects than Tagamed.
Here the value-in-use was obviously not given by the product’s value share of
a finished product, but by the better tolerance of end-users. The gamble paid
off, propelling Zantac into market leadership for the next decade and allowing
Glaxo to turn into a serious market player.
Trade-off based pricing can be employed where many additional attributes

can be attached to a product, i.e. where a product either is (by itself) or can be
made into (via attributes) a non-commodity. For trade-off based pricing, vari-
ous product bundles are defined by attaching, e.g. differing delivery schedules,
days payable, levels of technical service, or flexibility in order size. The custom-
er can then choose between a multitude of slightly different product “bundles”
at different prices. In this way, the value extracted from the customer can be
maximized.
Both value-in-use and trade-off based pricing result in prices that are not
transparent to the customers. This can only be maintained if the underlying
goods or the value for the customer differs from one client to the other, so that
direct comparisons are impossible.
Even where sophisticated pricing systems exist, their implementation and Strategic pricing can only
daily use is often problematic. Acting with the necessary pricing discipline fre- succeed if employees com-
mit to the logic
quently implies making difficult choices. One of these choices is the classic one
of letting go of an unprofitable account with a long-standing relationship. If the
customer has too little potential, he must be abandoned in favor of developing
accounts better suited for the company’s value proposition and chosen strate-
gic direction. For this to happen, communication and discipline are essential.
The company’s strategy – including the pricing strategy and its objectives
within the overall strategic framework – need to be communicated thoroughly
to the account managers. Only if these issues are clear and unambiguous, and
if the account managers internalize these concepts thoroughly, will they be able
to live the new system and make their decisions in accordance with the general
strategic direction. Most companies who have successfully implemented alter-
native pricing strategies and tools have managed it as a change management
effort similar to a large-scale corporate reorganization.
MONITOR GROUP 39
40 MONITOR GROUP
VI. Lever 4: Branding for Results and
Premium Margins
For chemicals companies, as for many business-to-business companies, brand- Branding is a useful tool
ing is not an obvious topic. After all, there are no mass consumers to be attracted for decommoditizing an
offering
or mass markets to be convinced of a product benefit. Purchasing decisions are
made by professional buyers based on direct interactions, specific product per-
formance and price. However, these arguments underestimate the impact and
value of a brand, even in an environment such as the chemicals industry.
A brand is the sum of the functional and emotional associations about a prod-
uct or a company (corporate brand) that are held in the minds of customers,
company employees and key stakeholders, and that are based on their experi-
ences with the brand. Ideally, a brand gives customers trust in the product or
producer and therefore makes them more willing not only to buy the product
or solution, but to prefer it over competitive offers. The strength of a brand
can therefore be inferred (among other things) from customer behavior.
Companies with strong (product or corporate) brands can either command a
premium price for an otherwise identical product/solution or receive the bulk
of the business over a similarly priced competitor when price is a key purchase
factor and there are no other more substantive ways to differentiate and add
value for the customers.
Taking the current situation in the chemicals industry as an indicator, i.e.

decreasing profitability despite cost cutting, fierce direct competition, and
eroding prices, the strength of both product and corporate brands needs to
be questioned, as does the self-perception of high proficiency in this area (see
survey results above, Exhibit 5). This obviously does not mean that building a
strong brand is the one answer to all the problems mentioned above. However,
it is clearly one of the levers that can and must be utilized together with others
such as positioning and differentiation.
Our survey identifies how little importance the chemicals industry gives to Branding is virtually non-
both product and corporate brands and the associated positioning of the existent in the chemicals
industry
respective product or company (see Exhibit 19). None of the standard pro-
cesses is used by more than 30 percent of the respondents, and especially the
key tool of articulating a brand and its message corporate-wide is used by 13
percent of the companies only. Moreover, generally there is no overarching
corporate responsibility to be found for “branding/marketing”; this function
is mostly bundled into corporate communications or investor relations. With
few exceptions, the chemicals industry is not using the concept of branding
systematically.
MONITOR GROUP 41
VI. Lever 4: Branding for Results and Premium Margins
This lack seems to be intentional. While the survey found differentiation

through innovative products to be very high on the industry’s agenda, posi-
tioning and differentiation through means of marketing were regarded as least
important value creator (see above, Exhibit 6).
Exhibit 19: Tools Used in Branding and Positioning (Survey Results)
A strong brand is something usually developed by typical consumer companies.

The most prominent example is Coca Cola, quoted as the most valuable brand
worldwide for decades. Nevertheless, Interbrand’s 2003 ranking of the world’s
100 top brands also includes companies from less obvious industries that gen-
erally have difficulties establishing a strong (mental) presence with classical
consumers. Admittedly, the list names only seven (mainly) industrial goods
companies such as IBM, GE, and Intel, six professional services companies (e.g.
Morgan Stanley, Accenture and Reuters), three banks/financial services com-
panies (e.g. Citibank, American Express) and three pharmaceutical companies
(e.g. Pfizer, Merck). However, except for the oil-companies BP, Shell, and Mobil
– and similar to, e.g., utilities companies – not one chemical company made it
onto the list, although one would have expected to see some famous names like
BASF, DuPont, Dow Chemical or Bayer.
42 MONITOR GROUP
In the chemicals industry, the concept of branding is applied far too little. A Proactive branding creates
strong brand summarizes the company value proposition and the desired attri- value and provides focus
butes that will define the company. As such it helps customers and external
stakeholders to develop a positive attitude towards the company, and provides
focus for the employees individually and the entire organization as a whole.
However, a brand is not built on what we say we do, but on what we do. After
defining what exactly the brand is supposed to convey, the entire organization
must therefore be enabled to deliver an “on-brand” customer experience, i.e. a
customer interaction that reinforces the image the customer wants to present to
customers, markets and employees. For more details on brands, their “activa-
tion” and their positive effects, please refer to the section “Effective Branding”
at the end of this chapter
Building a brand pro-actively – and that does not imply TV advertising or

glossy inserts in popular magazines – has many benefits. It means that a com-
pany proactively defines what it intends and stands for. That in turn steers the
actions internally and externally that create believability, credibility, and trust.
In the absence of pro-active steering, customers assemble their associations
randomly, e.g. from competitors’ information, rumors, and the press. The resul-
tant product or corporate brand will be fuzzy at best. Conscious branding, i.e.
the continuous process of proactively managing and communicating the unique
and relevant ways in which the respective product or company creates value for
its customers, therefore has the invaluable benefit of having the value proposi-
tion clearly articulated by the company, not by competitors and the market, and
thus reducing the risk of misinterpretation.
Companies need to reevaluate the way they think about branding – from an Better branding is needed
expensive, misunderstood concept to a behavior-based activity designed to to increase differentiation
and build trust
increase company revenues. Branding in the overarching sense described
here encapsulates how an organization develops, guides and communicates
its behavior to optimize its share of business from customers. The difference
between this concept and what the chemicals industry has been practicing thus
far is significant. Product “branding” in the chemicals industry is largely about
patenting and licensing, while corporate brands get virtually no attention at
all. In reality, a strong corporate brand is especially important for the high-risk
industries mentioned above.
Applying this holistic concept of branding to a company is a difficult process,

as it encompasses the entire organization as well as customers and markets.
Different from many consumer goods industries, it is not necessary to use
a large marketing budget to “drill home” the new message. In this industry,
emphasis should be placed on understanding customers, articulating brand
MONITOR GROUP 43
intent and brand message, changing employees' perception and behaviour and
refocusing entire companies. Together with customer targeting and pricing
tools, branding – as it refers to aligning the organization closely with what the
chosen target segments want and delivering a specifically tailored, unique, and
consistent value proposition – builds much needed differentiation and enables
a company to avoid the trap of low and decreasing profitability.
• We measure and track the value of our brand.

• Brand is a key component of our value proposition and we know how
much it is worth to our customers.
• Our front-line organization can articulate our brand’s intent and can exe-
cute its tasks in a way that delivers “on-brand” experiences to customers.
• Our brand enables us to achieve above average margins.
• “Brand” is a board issue high on the agenda of the CEO.
Effective Branding
Branding is about Branding is about connecting a name/logo with a positive association that
“rebuilding the house”, will support the company in its business. However, simply selecting appropri-
not “applying a new layer
of paint” ate associations does not make a brand successful. Associations do not form
according to what people are told about the brand, but according to their own
experiences with the company and its products and services. Consistency
between the intended strategy, positioning, and brand on one hand and the
actually delivered experience (both externally to the customers and internally
to employees) on the other hand is critical for success. This has two conse-
quences. First, the strategic positioning of the company must be compatible
with what it can realistically deliver. Otherwise not only the brand, but also the
entire strategy will fail. Second, once the overall strategic framework fits with
the company’s capabilities, the entire organization must be enabled to deliver
an “on-brand” customer experience. Activating a brand in such a way must
happen on a very detailed, very operational level and is therefore a serious
change management initiative.
A brand needs to be This change management part of a branding effort is the most time consum-
“activated” to be successful ing, most difficult and most often neglected aspect of branding. It requires not
only making the brand intent understood throughout the entire organization,
but also focusing all employees and processes on customer needs and how to
best fulfill them. Ultimately, the organization must be turned around to deliver
44 MONITOR GROUP
“on-brand” customer experiences consistently, i.e. everywhere, all the time and
in all forms of interactions.
Internal resistance to such “brand activation” is often enormous. Not only

are most organizations inherently resistant to change. More fundamentally,
“branding” and “marketing” in general have a very bad reputation in most
industrial goods companies. Especially the business organization is usually
deeply suspicious of suggestions from marketing, corporate communication or
strategy departments and needs to be shown the economic impact of an improved
brand and “on-brand” behavior. Ultimately, one “test” can be used to determine
the validity and quality of the design and implementation of a brand: if the sales
force can explain the brand/positioning to a customer and use it to generate addi-
tional sales, then the branding exercise has been successful.
A brand that has been built successfully provides focus to the company. It has
two spheres of influence: the external sphere of influence includes the custom-
ers and key stakeholders, whereas the internal one encompasses the company’s
employees.
Externally, a brand summarizes the company value proposition and the desired Externally, a brand enables
attributes that will define the company, i.e. “who the firm is and what it stands a firm to sell more than
product specifications
for”. As such, it will provide trust, guidance and a purchasing criterion for cus-
tomers who need to decide on their business partner. This is much more impor-
tant in B2B customer relationships than in consumer markets and especially
crucial in industries such as chemicals where there is a strong focus on long-
term and personal customer relationships. Generally, the products or solutions
purchased are critical components of the purchasing company’s value chain.
What counts here is not persuasion, as in many consumer markets where value
is often created instantly after a purchase, but performance, which includes
product performance, reliability, and service, as well as financial stability, eth-
ics, and integrity as guarantors of a stable and long-term relationship. In such
a relationship, value is built over time rather than instantly. It is this value and
this performance that a (corporate or product) brand needs to capture and con-
vey in order for customers to have an immediate association with these attri-
butes. In this way, brands improve customer retention, enable the company to
charge a premium and thus even act as barrier to competition.
The second external component – stakeholders – is becoming increasingly

important in Europe, particularly for perceived “high-risk” industries like
pharmaceuticals, oil, energy, and chemicals, that have a potentially large envi-
ronmental and health impacts. The power of political activist groups, environ-
mentalists, and NGOs should not be underestimated. The economic impact of
MONITOR GROUP 45
these groups on a target company can be significant, be it through disruption of

processes, delays of approval, general purchase boycotts, or simply by tainting
– whether justified or not – the reputation of a company enough so that existing
and potential customers hesitate to be seen doing business with it. Regarding
these stakeholders, an extension of the corporate brand to include relevant
parameters can lessen the company’s vulnerability to a crisis.
Internally, a brand is a Internally, the brand also summarizes the company value proposition and the
strong steering mecha- desired attributes that will define the company, i.e. “who the firm is and what
nism to align the whole
organization it stands for”. The implications are different. In an internal context, a strong
brand acts as a guiding force that helps the organization focus on delivering
products, services, and experiences that will exceed customer expectations
and thereby reinforce the brand in customers’ minds. It therefore enables the
company to use the power of what it wants to be and/or its reputation to drive
consistent actions throughout the organization. As an organizational steering
mechanism, a brand may thus achieve what the often blasé vision/mission
statements frequently fail to do. In addition, a strong brand helps significantly
in the areas of recruiting and retention, something especially important as
chemicals companies often lose the “war of talents” against industries that are
perceived to be more attractive.
Example: A large energy Consider the case of a large energy service provider. The company had found
service provider changed that neither it nor any of its four major competitors stood out in the minds of
internally to reinforce a
new brand intent its (mainly B2B) customers. The company conducted extensive research among
customers and non-customers in order to learn about customers’ needs and
complaints as well as competitors’ perceived positioning. As a response, the
company decided to position itself as possessing the innovations and expertise
to create opportunities for customers and deliver value-adding results.
In a second step, the customers’ experience with the company needed to be

changed in order to support and reinforce this image. One main focus was
the sales force, which customers felt contributed most significantly to their
perception of the company. Brand harming actions identified in the customer
interviews – for example repeated uncompetitive pricing, repeatedly submit-
ting proposals that do not address the customer’s actual request, or inconsistent
behavior among different customer touch points (e.g. marketers and traders)
– were eliminated. In addition, brand-building actions were defined. Rules and
processes were established on frequencies of visits, topics of visits or response
times for calls. A culture change was brought about to treat customers with
an unusual openness. For example, if a sales representative did not have the
option of submitting a competitive offer, for whatever reason, customers were
46 MONITOR GROUP
informed of this fact upfront rather than sending uncompetitive quotes or

delaying an answer inappropriately. Unrealistic, vague promises were replaced
with direct and open answers and a constructive way of thinking through cus-
tomers’ problems. New sales support material conveyed the new messages.
An internal “brand education” program clearly explained not only the “new”
brand intent and the economic benefits of a strengthened brand/reputation,
but also the roles of the individual employees in achieving such a change.
The results of the branding efforts were very positive. Drastic improvements
could not only be seen in soft factors, where the company gained on key attri-
butes and jumped from an on-par rating with two other competitors to being
considered as the most favorite brand by a factor of two during the period
analyzed. The company also managed to increase sales by 20 percent in the
pilot areas and posted a significant market share increase while the primary
competitor’s shares declined.
MONITOR GROUP 47
48 MONITOR GROUP
VII. Beyond the Customer:
Managing Industry Dynamics
These four new levers for creating value in chemicals – improved innovation, The industry has
customer targeting, pricing, and branding – all have the same goal, namely to significant potential to
improve its competitive
differentiate the company in the eyes of its customers and therefore allow it to environment
escape the ongoing commoditization and price erosion. As always, there cer-
tainly exist other areas of possible improvement. In addition to looking at the
relationships between customers and companies, the industry as a whole needs
work. A more active and conscious management of industry dynamics would
help improve the overall competitive environment significantly.
Managing industry dynamics is predominantly about increasing the value pool

of an industry, i.e. the total value in an industry to be distributed among its
players. The chemicals industry has been hit especially hard by commoditiza-
tion and price erosion, as seen in the overall lack of value generation in the
industry (see above, Exhibit 2). Contrary to common belief, industry environ-
ments can be managed actively and openly without resorting to illegal practices
such as fixing prices or market shares.
To increase the value pool of an industry, the distribution of value between two Through price stabiliza-
industries, i.e. along the value chain, needs to be shifted. Several options exist tion, a disciplined industry
can move value into their
to achieve this, all of them achievable within the realms of competition law and industry
without any form of uncompetitive behavior or collusion. Implicitly, rules of
conduct can change when industry consensus emerges on long-term winning
gaming strategies. More noticeable are changes in capacity management or a
drive towards consolidation. The most explicit form may be cooptition, a hybrid
word – and concept – combining cooperation and competition. Cooptition is
what happens in industry clusters for example. Members of the cluster may
compete for customers, in marketing, and the development of technology into
marketable products, but may cooperate in market development and customer
education, raw material purchasing, or basic research to save costs and drive
the industry forward in ways not possible for the individual players.
CASE STUDY
In the airlines industry, for example, stabilization is sought through the cre- Cooptition changed
ation of alliances such as British Airway’s oneworld or Lufthansa’s Star Alliance. the shape of the
airlines industry
The value is created not only through shared services (both shared flights
and ground services), purchasing advantages or better value propositions
through harmonized flight schedules. Most notably, as each network generates
MONITOR GROUP 49
VII. Beyond the Customer: Managing Industry Dynamics
increased revenues from its existing players, and as bonus programs make
the systems captive, inter-network competition has decreased. Together
with the obvious reduction of intra-network competition, this has reduced
the overall level of competition and has thus stabilized prices and moved
value into the industry.
A well-defined market In order to achieve price stabilization in an industry – or, more precisely, a
segment and a strong clearly defined segment or pocket of the market – with any of these concepts,
industry leader
are prerequisites two prerequisites must be fulfilled. First, a clearly defined segment of the mar-
ket is needed, shielded by barriers against other parts of the market and new
entrants and therefore influenceable by the existing players. Naturally, this is
rarely the case. However, where there are no barriers between different seg-
ments, “ring fencing” can be used to create a well-defined market segment. Such
a “fence” can take the shape of special certification or qualification, government
regulation, or (most often) technology that is so advanced or necessary invest-
ments that are so high that only a few companies are able to keep pace.
Second, a strong industry leader must exist who can use its market influence to
achieve the necessary alignment between the market players. This leader must
be strong enough to force the remaining players into cooperation by exerting a
credible threat to “punish” those players who refuse to play by the new rules.
For this credibility to exist, he needs not only a lower cost base than the oth-
ers in order to be able to wage and win punitive price wars. He must also have
shown the managerial willingness to exert such an influence and follow up on
the threat.
Improving industry Attempting changes in industry dynamics is a potentially risky undertaking.

dynamics needs a funda- Shifting balances from their current equilibrium can lead to destabilization and
mental understanding of
the status quo can worsen the existing situation. Any such moves must therefore only be made
after a company has gained a deep understanding of the industry it is active in
and its relationship with adjacent value chain steps. When the analyses point
in the right direction, however, it is possible to improve industry dynamics in
a matter of months. Especially if an industry has suffered for a long time, sta-
bilizing initiatives from an industry leader can be quite welcome. The industry
leader should establish credibility in the industry, act consistently and clearly
account for the benefit of all players, as opposed to basing decisions purely
on self-interest. Otherwise, trust cannot be established and its moves will be
undermined, continuing to worsen an already highly competitive and often
unprofitable environment.
50 MONITOR GROUP
VII. Beyond the Customer: Managing Industry Dynamics
For years, the profitability situation in chemicals has been unsatisfactory. Chemicals companies
Prolonged low value generation will convince rational investors to cease will have to react soon
providing funds. Industry attractiveness decreases not only for the financial
community, however, but also for employees and especially for talented and
motivated leaders. At that stage, the downward spiral would become very dif-
ficult to reverse.
We believe that the chemicals industry players will not return to long-term
positive value creation unless they manage to shift value from their customers
and customers’ customers, first to the industry and then to themselves. Unless
a new mindset around customers and competition emerges, another survey in
five years will yield the same, largely unsatisfactory results. Furthermore, it will
identify the industry’s incapability to deal with the challenges posed by devel-
opments in both their customers’ industries and their own industry.
MONITOR GROUP 51
About Monitor Group
Founded in 1983 by Professor Michael Porter and colleagues at Harvard

Business School, Monitor Group is a leading global strategy consulting firm
with more than 1,000 consultants in 29 offices around the world. Since its
founding, Monitor Group has remained focused on a core mission: Apply-
ing leading-edge analysis to help its clients define robust strategies as
well as actions to transform these strategies into sustainable advantage.
Monitor’s clients are primarily from the financial services, chemicals, phar-
maceuticals, telecommunication, automotive, consumer goods, retail, and
media industries.
While primarily focused on strategy consulting, Monitor Group has con-

tinually developed a broader portfolio of professional services. Building on
a strong foundation in corporate and competitive strategy, Monitor Group
has honed leading edge skills in marketing strategy, organizational analy-
sis, corporate finance, and private equity.
Contributing authors:
Bernd Altpeter, M2C, Frankfurt; Frank Blithe, Monitor Group, Munich;

Steffen Gackstatter, IMI, Munich; Tarek Haddad, Monitor Group, Munich;
Andrew Harris, Monitor Group, London; Marc-Oliver Mewes, Monitor
Group, Paris; Bob Pagano, M2C Cambridge, MA; Igor Stychinsky, Monitor
Group, London
Written in collaboration with Sibylle Pollehn, Monitor Group,

Munich
Gerhard Prinsloo, Vice President of Monitor Group, Munich, has
advised clients globally on Corporate and Business Unit Strategy,
M&A, and Organization issues. He has worked in numerous capital and
technology intensive industries including chemicals, metals, mining &
minerals, industrial goods and financial services. He is currently a member
of various Monitor content communities and is also responsible for lead-
ing Monitor Group’s activities in Eastern Europe and Russia.
Thomas Kipp, Vice President of Monitor Group, has advised clients glo-
bally on issues related to Corporate and Business Unit Strategy, Marketing
and Sales Strategies and Innovation Management. He has worked in numer-
ous industries including chemicals, automotive, postal and logistics, rail and
fast moving consumer goods. He is based in the Munich office.
Dr. Tony Hamer, Vice President of Monitor Group, London, heads up

Innovation Management in Europe and assists clients globally on com-
pany strategy with special emphasis on the role of innovation to develop
and support valuable differentiated strategic options. He has worked
extensively in the petrochemicals, chemicals and the energy industries
and has held senior business and technology management positions at
Exxon, Union Carbide, Olin, and the Gas Research Institute. Tony also
advises clients in specialty chemicals, coatings and adhesives, bio- and
advanced materials.
If you are interested in knowing more about the study, please contact:
John Diener Anthony May

Monitor Group Monitor Group
Suite 808, Millennium Tower 1003-7A, Shui on Centre
38 Xiao Yun Road, Chaoyang District 6-8 Harbour Road, Wanchai
Beijing 100027 Hong Kong
China Tel.: +852 - 22 84-80 00
Tel.: +86 (0)10 - 84 53-88 00
For additional copies, please email us at: info_asiapacific@monitor.com
monitor group
Gerhard Prinsloo, Vice President of Monitor Group, Munich, has
advised clients globally on Corporate and Business Unit Strategy,
M&A, and Organization issues. He has worked in numerous capital and
technology intensive industries including chemicals, metals, mining &
minerals, industrial goods and financial services. He is currently a member
of various Monitor content communities and is also responsible for lead-
ing Monitor Group’s activities in Eastern Europe and Russia.
Thomas Kipp, Vice President of Monitor Group, has advised clients glo-
bally on issues related to Corporate and Business Unit Strategy, Marketing
and Sales Strategies and Innovation Management. He has worked in numer-
ous industries including chemicals, automotive, postal and logistics, rail and
fast moving consumer goods. He is based in the Munich office.
Dr. Tony Hamer, Vice President of Monitor Group, London, heads up

Innovation Management in Europe and assists clients globally on com-
pany strategy with special emphasis on the role of innovation to develop
and support valuable differentiated strategic options. He has worked
extensively in the petrochemicals, chemicals and the energy industries
and has held senior business and technology management positions at
Exxon, Union Carbide, Olin, and the Gas Research Institute. Tony also
advises clients in specialty chemicals, coatings and adhesives, bio- and
advanced materials.
If you are interested in knowing more about the study, please call one of the
authors.
Monitor Group Monitor Group

Maximilianstrasse 14 Michelin House
80539 Munich 81 Fulham Road
Germany London SW3 6RD
Tel.: +49 (0)89 – 2 55 48-0 Great Britain
Tel.: +44 (0)20 - 78 38-65 00
For additional copies, please email us at: sisi_deschl@monitor.com
monitor group

Monitor Generating Value Chemicals

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I. Foreword and Executive Summary ............................................... p. 5

II. The Need for New Levers to Create Value.................................. p. 9

III. Lever 1: Recasting Innovation Management ........................... p. 15

IV. Lever 2: Targeting Customers Better ........................................ p. 25

V. Lever 3: Pricing for Value and Profit .......................................... p. 33

VI. Lever 4: Branding for Results and Premium Margins ........ p. 41

VII. Beyond the Customer: Managing Industry Dynamics ......... p. 49

Exhibit 1: Illustrative Value Drivers in the Chemicals Industry

Source: Monitor Estimate

itself to customers in innovative ways, i.e. through customer targeting, market-

Innovation (Chapter 3):

• Companies should take a more comprehensive view of innovation and

Customer Targeting (Chapter 4):

• Companies should divide their markets into meaningful and action-

Pricing (Chapter 5):

• Companies need to act in recognition of the importance of pricing as a

• Consistent and value-generating pricing requires the definition of an

Branding (Chapter 6):

• Companies need to proactively build their brand(s)

It is crucial to begin learning to shift value from customers and customers’

Exhibit 2: Economic Profit Spread of the European Chemicals Industry,

Exhibit 3: Profitability in Basic Industries, 1998-2003/1999-2004

1Top 10 companies by market capitalization, weighted, Apr 04

Exhibit 4: Companies’ Average Self-Ratings Relative to Benchmark Competitors

Note: Industry benchmark = 10; self rating on a scale from 1 to 10

Exhibit 5: Companies’ Average Self-Ratings Regarding Specific Processes

also evident in the companies’ very similar positioning. Little differentiation

Exhibit 6: Relative Importance of Value Creators (Survey Results)

Exhibit 7: Publicly Communicated Strategies of 17 Large Chemicals Companies

1 Industryconsolidation, vertical integration, complemenation of portfolio, etc.

Exhibit 8: Use of Tools Regarding R&D and Innovation (Survey Results)

Exhibit 9: The Innovation Diamond – a State of the Art Framework for

• Develop a coherent innovation strategy and reprioritize invest-

Benchmark against best-in-class

THE INNOVATION DIAMOND

The following parameters or facets need to be managed in an integrated

Facet 1: Use and management of portfolios must be expanded

A multitude of relevant parameters should be used to assess and manage these

For example, in the stagnating agrochemicals market companies have had to

Facet 2: “Platforms” are best practice to develop focus and efficien-

Many organizations are now adopting a best practice where complementary

Facet 3: Partnerships provide complementary competencies,

Partnerships can vary in depth, from “reactive partnerships”, established ad hoc

Facet 4: Networks enable the exchange of knowledge within and

Facet 5: A good innovation pipeline provides high value capturing

Exhibit 10: State-of-the-Art Development Pipeline

Facet 6: Insight into customers, competitors,

erating and offering solutions to these opportunities, the company diversified

Facet 7: Innovation needs an investment and growth attitude

To round off this multi-faceted approach to innovation and achieve highest

Source: Monitor Survey

Exhibit 12: Tools Used in the Segmentation and Targeting of Customers

Source: Monitor Survey

Such an action-oriented segmentation can even be used to complement existing

However, when analyzing and segmenting the market – including numerous

Benchmark against best-in-class

Effective Customer Targeting

Innovative segmentation is “meaningful” in that the assignment of a customer

Exhibit 14: Example of Innovative Customer Segmentation

more stable segment. Therefore, supplier relationships had a longer-term per-