Digitalizing the Core

Chemical companies are asset-heavy, so no surprise, there is a lot of potential in extracting value from the ‘core’ business and assets.

Manufacturing and supply chain are clear areas of focus: concepts such as predictive maintenance could unlock great value by improving reliability (and therefore utilization of the assets), while advanced decision support systems and Real-Time-Optimizers could help substantially improve the yields and gross margin. Huge value is also in optimizing the overall supply chain end-to-end, from forecasting demand through artificial intelligence, to optimizing planning and scheduling, while minimizing inventories and inefficiencies in logistics.  Last but not least: digital could contribute to safety, thanks to a concept of ‘connected’ workforce that could alert when operators are in risky areas or when sensors alert of accidents (e.g. ‘man-down’) always allowing to localize the workforce.

In Marketing & Sales, another existing core area for chemical companies, there is huge potential in using digital tools and channels to make sales more effective and efficient, therefore improving the ability to market more volumes at a lower cost, but also to extract more value through digital pricing.

Other core areas are R&D, where digital could enable a much faster time to market of innovation (many examples already existing today in virtual experimentation, even among chemical companies) and engineering, where time-to-market but also costs and capital efficiency could result from adoption of digital tools such as the digital twin.

Of course, the potential also exists in corporate functions (e.g., Finance, HR, etc.), where better services could be provided in a much more efficient way.

Beyond the Core: How Chemical Players are Making ‘Bets’ on New Business Ventures

Beyond the core, chemical players are also making ‘bets’ in new business models – that is, leveraging existing assets, expertise, or client base, in conjunction with digital, to access new value pools adjacent to the core business. This is an avenue for growth – launching new business ventures to monetize data or capabilities, leveraging a right-to-win by the company often in the form of access to market, expertise or assets. But in many cases, it is also a defensive move since digital has enabled many ‘digital attackers’ along the chemical value chain, small start-ups that in a short period, could appropriate significant margins from the incumbents. A case in point is the commercial platforms and digital market places – of course, going down the value chain, chemical companies could ‘disintermediate’ distributors and appropriate additional margins – at the same time, this is a defensive move from the ‘Amazon’ of this world, that could ‘disintermediate’ the chemical companies themselves from the customers or distributors, and confine to a role of mere manufacturer.

While ‘digitalizing the core’ offers a lot of potential value in terms of competitiveness in the industry as we know it, the big disruptions and ‘reshuffle’ of value pools are expected to come from such new ‘business models’ (in the book industry, the disruptor was not a more efficient and automated chain of physical book stores – but rather a completely new online business model).  Typically such disruptions happen at the customer interface when a digital attacker can solve specific pain points experienced by customers, or imagine and solve for a ‘latent need,’ something not even the customer can articulate, but that once experienced, change the behavior itself of the customer (if Henry Ford has asked users how to get faster to point A to point B, the pain point would have been slow horses, and the solution faster or more horses – not the car! A similar, and more recent, ‘latent need’ was the Ipad). These are the most dangerous kind of disruptions – and also happen in B2B, not only B2C.

In the chemical industry, these disruptions have not yet taken place – but most big chemical companies are placing bets (2-3-10 ‘digital ventures’) in different parts of the value chain: from R&D to Marketing & Sales.

How we go from here?

A digital transformation has deep implications on how people work and is organized. To succeed, it is important to structure a rigorous program:

• Start from the strategy – why are we doing it? Gaining efficiency, penetrate new markets, and value pools? Both? It is important to achieve a consensus within the organization on the objectives, the ‘why?’, and what success will look like. This will influence and shape much of the strategy
• Separate the governance of ‘digitalizing the core’ from ‘new business models’ – both are required, but they need a different set-up. New business models could be ideated, incubated and commercialized outside the organization
• Structure a number of essential enablers:
  • Set-up a rigorous governance and organization for digital
  • Invest in new processes and new agile way of working – digital does not work in a typical ‘waterfall’ or ‘design-to-specs’ approach (that is the natural tendency of engineering-driven organizations focused on large capital projects such as chemical companies)
  • Define how to attract and retail digital talents, and upskill capabilities – let’s face it, digital talents don’t want to work in mature manufacturing companies. Chemical companies need to create a different and protected environment, a different recruitment brand, different development paths for digital talents. Since it is difficult, don’t be tempted to outsource everything. Companies need to have in-house digital capabilities –it is not about buying applications or ‘tools.’ Tools, applications, etc. can be purchased – not the data scientist training the AI algorithms on your specific data and assets. This is a source of sustainable competitive advantage.
  • Create data platforms and the right interfaces with legacy systems (in most cases without the need to change them!), developing the right cybersecurity policies and systems

Still, according to a recent BCG survey, 75 percent of digital transformation efforts fall below expectations. Why such a high failure rate? Experience shows some typical pitfalls:

• Lack of alignment and focus. Initiatives are often too much driven by technology – rather than by the business case. Too many pilots and fancy digital solutions are deployed without a clear impact. Prioritization based on value is essential. Also, often the short-term impact is over-estimated – creating frustration if results are not quickly realized. Vice versa, long term transformational impact is often under-estimated. Often there is an unspoken disagreement among leaders around digital – or at least, not the same understanding of the digital priorities. In some cases, the digital program has a sub-optimal governance and operating model, and the incentives on digital are not properly allocated between the center and the business units, resulting in conflicting agendas.
• Communication and change. Failure to effectively communicate goals, strategy, purpose, and outlook leads to ‘fading’ enthusiasm, and in many cases resistance to change
• Capabilities and resources. Often, time and resources are allocated against the wrong priorities, and there is a lack of focus on attracting, hiring, retaining, and developing digital talents.

From the same research, BCG has found that digital champions:

• Invest money in digital – More than 60 percent of digital champions invest more than 5 percent of OPEX in digital
• Secure digital talent – More than 50 percent of digital champions have managed to get more than 10 percent of FTEs with digital capabilities and have embedded these in the business
• Put in place the right governance and organization – 40 percent of companies ranked as digital champions already have well-structured digital organization and governance in place

Everybody is on the digital journey in some respect; however, there is much value to be tapped. Digital should be at the core to win in the 20s, and companies should learn from best practices to make sure their digital transformation is a success and can provide true competitive advantage.