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Value Creation: Strategies for the Chemical Industry, 2nd Edition

ISBN: 978-3-527-31266-5
501 pages
January 2006
Value Creation: Strategies for the Chemical Industry, 2nd Edition (3527312668) cover image

Description

Written by a global team of top managers and senior McKinsey experts, this expanded and completely revised second edition provides a wide-ranging manual on the subject of value creation in the chemical industry.
Drawing on extensive first-hand management experience, several hundred consulting engagements, and in-depth research projects, the authors outline the key ingredients for managing chemical companies successfully. The book addresses in detail key issues of strategy and industry structure, describes best practice in the core functions of the chemical business system, looks at the state of the art in organization and post-merger management, and covers a selection of the most important current topics such as industrial biotechnology, the role of private equity, and the chemical landscape in China.
Although mainly directed at executives and managers in the chemical industry, the knowledge contained in this comprehensive overview will also benefit scientists, engineers, investors, students, and anyone else dealing with management issues in this sector.
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Table of Contents

Preface XVII

Acknowledgements XIX

List of Contributors XXI

1 Today’s Chemical Industry: Which Way Is Up? 1
Karsten Hofmann and Florian Budde

1.1 The Chemical Industry Today – A Snapshot 1

1.2 Eras of the Chemical Industry 7

1.3 Summary 10

2 Shareholder Value Orientation: Not a Question of Whether, but How 11
Bernd Heinemann and Thomas Augat

2.1 Capital Market Deviations as the Key Challenge for Shareholder Value Orientation 11

2.2 How Capital Markets Reflect Fundamental Value Creation 13

2.2.1 Capital Markets and Effects of Earnings Announcements 13

2.2.2 Capital Markets and Expectations on Fundamental Value Creation 15

2.3 New Tools for an Advanced Shareholder Value Orientation 19

2.3.1 Capital Market Diagnostic: Gain an In-depth Understanding of Capital Market Signals 19

2.3.2 Financing Policy: Harmonizing Financing with Strategy 22

2.3.3 Investor Relations: from a PR Approach to Targeted Marketing 24

2.4 Summary 26

3 Structural Drivers of Value Creation in the Chemical Industry 27
Eric Bartels, Thomas Augat, and Florian Budde

3.1 Introduction to the Study 27

3.2 Mobility in a Mature Industry 28

3.3 What Drives Performance? 30

3.4 A Closer Look at Value Creation in the Segments 33

3.4.1 Commodity Companies 33

3.4.2 Specialty Companies 35

3.4.3 Diversified Companies 36

3.5 Summary 38

4 Chemicals – Driving Innovation in Other Industries 41
Thomas Schreckenbach and Werner Becker

4.1 Liquid Crystals: Superlative, Not Superfluous 42

4.1.1 Staying Power 44

4.1.2 Managing an Active Patent Strategy 45

4.1.3 A Customer-focused Approach Built on Expertise in Production and Application Technology 46

4.1.4 Timing is Everything: Internationalization and Diversification 50

4.1.5 The Best Intellects 50

4.2 Outlook 51

4.3 Summary 52

5 Today’s Challenges and Strategic Choices 53
Florian Budde, Utz-Hellmuth Felcht, and Heiner Frankem lle

5.1 Overall Outlook Stable 54

5.2 The Value Kaleidoscope 55

5.2.1 East, West, Is Home Best? 56

5.2.2 The Feedstock Rollercoaster 57

5.2.3 Biotechnology – Looking into the Seeds of Time 58

5.2.4 Mergers and Acquisitions 59

5.3 What Happens Next? 59

5.4 Summary 61

6 An Approach to Determining the Long-term Attractiveness of Commodity Chemical Businesses 63
Scott Andre, Sunil Sanghvi, and Thomas R thel

6.1 Looking beyond Cyclicality 64

6.1.1 Two Types of Costs Needed to Anticipate the Future 65

6.1.2 The Role of Reinvestment Economics 66

6.1.3 Learning to Love Fly-ups 69

6.2 Putting the Model to Work 71

6.3 The Example of Ethylene 73

6.3.1 The Rise of the Middle East 73

6.3.2 Awash with Stranded Gas? 74

6.4 Tailoring the Model 75

6.5 Conclusion 76

6.6 Summary 76

7 Middle East: Opportunities and Challenges from the Rapid Emergence of a Global Petrochemical Hub 79
Christophe de Mahieu, Christian G'nther, and Jens Riese

7.1 Turning to the East 79

7.1.1 Booming Demand in Asia-Pacific 80

7.1.2 High Input Costs Render Western Companies Uncompetitive 81

7.2 Pathways to Growth for the Middle East 85

7.2.1 Local Capacity Expansion 85

7.2.2 Portfolio Expansion and Forward Integration 86

7.2.3 Geographic Expansion 87

7.2.4 Hurdles to Overcome 88

7.3 Way Forward for the West 89

7.4 Capturing the Value 90

7.4.1 Business Intelligence 90

7.4.2 Microeconomic Rigor 90

7.4.3 Managing Risks and Uncertainties 91

7.4.4 Organizational Excellence 91

7.4.5 Execution 92

7.5 Conclusion 92

7.6 Summary 93

8 Survival when It’s Hard to be Special: A Perspective on Specialty Chemicals 95
Eric Bartels, Jo)l Claret, Sabine Deppe, and Ralph Marquardt

8.1 Performance Has Been Disappointing 95

8.2 The Market Is Not Getting Any Easier 99

8.2.1 The Price-cost Squeeze Is Getting Tighter and Demand Is Maturing 99

8.2.2 Customer Industries Are Migrating 100

8.2.3 The Competitive Landscape Continues to Change 101

8.3 Meeting the Challenge – Five Key Levers to Pull 102

8.3.1 Revisit Strategies 102

8.3.2 Find a Winning Answer to Emerging and Developing Markets 103

8.3.3 Strive for Top-class Operational Performance 105

8.3.4 Rediscover Innovation 106

8.3.5 Upgrade Performance Management 107

8.4 Summary 108

9 Creating the World’s Leading Specialty Chemicals Company 109
Utz-Hellmuth Felcht

9.1 The Portfolio: “Creating the World’s Leading Specialty Chemicals Company” 109

9.1.1 Focus on Specialty Chemicals through Divestments 109

9.1.2 Development of the Core Portfolio through Organic Growth and Acquisitions 111

9.2 Organization: “as Decentralized as Possible, as Centralized as Necessary” 113

9.2.1 Market Oriented Business Units: “Business First” 113

9.2.2 Small Corporate Center, Independent Shared Services 116

9.2.3 Site Services 116

9.3 A United Corporate Culture: “Blue Spirit” 117

9.3.1 A New Brand for the Company with a New Name, Vision, Mission, Guidelines 118

9.3.2 Umbrella Brand Degussa: “Creating Essentials” 119

9.4 New Challenges and the Next Transformation Goals 120

9.4.1 Solutions to Customers 121

9.4.2 Emerging Markets 123

9.4.3 Site Excellence 124

9.4.4 Human and Corporate Excellence 124

9.5 Conclusion 124

9.6 Summary 125

10 Prospects for Agribusiness: an Essential Contribution to Global Food Demand 127
Michael Pragnell and Robert Berendes

10.1 The Rationale of Agribusiness 128

10.2 Three Eras of Agribusiness 130

10.3 Driving Plant Yield 132

10.4 Opportunities beyond Yield 134

10.5 Summary 134

11 Industrial Gases – Growth by Continued Self-Renewal 137
Aldo Belloni and Lennart Selander

11.1 HThe Invisible Industry’: Stability and Profitability 137

11.1.1 Industry Characteristics 138

11.1.2 Key Players 138

11.1.3 Financial Performance 140

11.2 One Hundred Years of Success: the Winning Ingredients 141

11.3 Fit for the Future: Ready to Meet the Challenges 143

11.3.1 Continued Operational Efficiency Improvements 143

11.3.2 Managing Capital Investments 144

11.3.3 Maintaining Growth 145

11.4 Summary 148

12 Perspectives of Chemical Distributors as Partners of Industry 149
Klaus Engel and Gabriele Roolfs-Broihan

12.1 From Wholesaling to Supply Chain Management: the Evolution of Chemical Distribution 150

12.2 An Industry on the Move – the Major Trends 152

12.3 Perspectives Within Changing Environments 153

12.3.1 Partners on a Global Scale 154

12.3.2 Partners Ensuring Compliance with Rising QSHE Standards 155

12.3.3 Partners along the Value Chain 156

12.4 The Future Outlook 157

12.5 Summary 158

13 Systematically Revitalizing Innovation in the Chemical Industry 159
Birgit K nig, Gary Farha, and Thomas Weskamp

13.1 Drivers of Innovation 160

13.1.1 Knowledge 161

13.1.2 Creativity 165

13.1.3 Perseverance 168

13.2 How to Organize for Innovation 170

13.3 Summary 172

14 Innovation for Growth 173
Thomas M. Connelly

14.1 The Ever-Present Challenges for the Innovation Process 173

14.2 Three Lessons Guide Us 177

14.2.1 Lesson 1 – Collaborate with both External and Internal Partners 177

14.2.2 Lesson 2 – Draw upon Many Sciences 181

14.2.3 Lesson 3 – Technologies Can Find Applications in Many Other Markets 183

14.3 What Will the Future Bring? 183

14.4 Summary 184

15 The Four Pillars of Sustainable Purchasing Transformations 185
Helge Jordan, Nicolas Reinecke, and Khosro Ezaz-Nikpay

15.1 Designing a Performance Transformation Program 186

15.2 Initiate and Anchor Behavioral Change in the Organization 188

15.3 Generate Impact through a Proven Value Creation Process 191

15.4 Create a Tailor-made Performance Measurement and Management System 196

15.5 Summary 199

16 Feedstock Price Volatility and How to Deal with It 201
Scott Andre and Sunil Sanghvi

16.1 What is Driving Feedstock Price Increases and Volatility? 201

16.1.1 Crude Oil Surprises 202

16.1.2 Natural Gas Price Contrasts 203

16.1.3 Petrochemicals – Layers of Volatility 205

16.2 A Brave New World of Feedstock 206

16.2.1 Step on the Gas 207

16.2.2 Coal Gets a New Look 208

16.2.3 Bio-based Feedstock 208

16.3 Meeting the Challenge of Feedstock Volatility 209

16.3.1 Optimizing Contracts 210

16.3.2 Hedging – Financial and Physical 210

16.3.3 Fleximizing 211

16.3.4 Looking for Advantage 212

16.3.5 Restructuring Assets and Taking the Offensive 212

16.4 Conclusion 213

16.5 Summary 213

17 Taking a Leap in Purchasing 215
Gregory Nelson

17.1 Maximizing Value Creation 215

17.1.1 Using Purchasing Power 216

17.1.2 Making Aggressive Input Changes 217

17.1.3 Scrutinizing Processes to Cut out Costs 218

17.1.4 Getting the Most out of Negotiations 218

17.2 Creating Sustainable Value for the Business 219

17.2.1 Carrying Out an Improvement Program 220

17.2.2 Building Capabilities 221

17.2.3 Tracking Performance 222

17.2.4 Putting a New Organization in Place 222

17.3 The Next Horizon 224

17.4 Summary 225

18 Excellence in Operations – the Never-ending Journey Continues 227
Leonhard Birnbaum

18.1 Operational Improvement – the Bar Is Rising 227

18.2 Making Lean Operations Happen in Chemicals 230

18.2.1 Defining Relevant Aspects of Successful and Sustainable Operational Transformations 231

18.2.2 Making Transformation Happen – Front-end Loading with Content 233

18.2.3 Making Transformation Happen – the Soft Side of Change 235

18.3 Summary 239

19 State-of-the-art Production Concepts in the Chemical Industry 241
Uwe Nickel

19.1 Operating in a Transformed Environment 242

19.1.1 Decelerating Innovation 242

19.1.2 Chemicals Have Become More Global than Ever 244

19.1.3 Competition from Low-cost Labor Countries Is Changing the Industry Landscape 244

19.2 Challenges and Responses 246

19.2.1 Structural Cost Optimization 247

19.2.2 Operational Cost Optimization 249

19.2.3 Managing Complexity 253

19.3 Outlook 256

19.4 Summary 256

20 The Role of Site Services and Infrastructure for Productivity Management 257
Alejandro Alcalde Rasch

20.1 Site Services and Infrastructure: an Important Driver of Manufacturing Productivity 257

20.2 Transition: Site Services and Infrastructure’s Coming of Age 258

20.3 Going Forward: Increasing Site Services and Infrastructure’s Competitiveness 262

20.3.1 To Divest or Not to Divest Site Services and Infrastructure? 262

20.3.2 Improving Performance and Growing Selectively 264

20.4 Summary 267

21 Creating a Revenue Advantage through Sales and Marketing Excellence 269
John Warner, Jo)l Claret, Ralph Marquardt, and Eric Roegner

21.1 Defining World Class 270

21.1.1 Developing a Winning Go-to-market Strategy 270

21.1.2 Value Chain Insights/Customer Segmentation 271

21.1.3 Target Customer Identification and Value Proposition Design 272

21.1.4 Defining the Customer Interface Model 273

21.1.5 Pricing Excellence 274

21.1.6 Performance Management 275

21.2 Building World Class Revenue Capability 275

21.2.1 Performance Expectations 277

21.2.2 Program Design 277

21.2.3 Commercial Toolkit 277

21.2.4 Capability Building Agenda 278

21.2.5 Mindsets and Behaviors 278

21.3 Summary 279

22 Achieving Top Performance in Supply Chain Management 281
Andrea Cappello, Martin L sch, and Christoph Schmitz

22.1 Supply Chain Management as a Strategic Lever for the Chemical Industry 281

22.2 Key Supply Chain Management Elements and Opportunities for the Chemical Industry 283

22.2.1 Service Level Management 284

22.2.2 Order and Demand Management 286

22.2.3 Production Management 287

22.2.4 Supply Management 288

22.2.5 Distribution Management 288

22.2.6 Integrated SCM Planning and Execution 289

22.3 Delivering on the Opportunities – the Key Success Factors for Achieving Top Performance 290

22.3.1 Designing Top-performing SCM 290

22.3.2 Managing an Improvement Program 294

22.4 Conclusion 295

22.5 Summary 295

23 Right Second Time – Unlocking Value with IT 297
Peter Peters and Detlev Ruland

23.1 Breaking the Barrier 297

23.2 World Class IT Infrastructure Management 299

23.3 ERP Harmonization as the Basis for Global Process Architectures 302

23.4 Making CRM Work to Create Profitable Growth 305

23.5 Key Success Factors for the Journey 308

23.6 Summary 309

24 Managing Organizational Performance 311
Karsten Hofmann and Heiner Frankem lle

24.1 Supporting Strategy by Structure 312

24.2 Understanding the Performance Challenge 315

24.3 Making Organizational Change Happen 318

24.3.1 Diagnosing the Status Quo 319

24.3.2 Designing the Program Architecture 321

24.3.3 Ensuring Effective Implementation 324

24.4 Summary 325

25 Post-Merger Management: it’s All in the Design 327
Eric Bartels, Tomas Koch, and Philip Eykerman

25.1 Phases of an Integration 328

25.2 Defining and Communicating the Aspirations 330

25.3 Fully Identifying Value Creation Potential 330

25.3.1 Determining the Synergy Potentials that are Directly Business-related 332

25.3.2 Securing the Business and Uncovering Additional Potential 334

25.3.3 Determining the Potential from New Strategic Opportunities 334

25.4 Determining the Cornerstones of an Effective Organization 335

25.4.1 Aligning Management Behind a Common Goal 336

25.4.2 Rapidly Determining New Organizational Structures 336

25.4.3 Building a Shared Performance Culture 337

25.4.4 Managing Top Talent 338

25.5 Tailoring the Integration Approach 338

25.5.1 Setting up a Powerful Project Organization 338

25.5.2 Selecting Project Management Tools 340

25.5.3 Communicating Permanently 340

25.6 Summary 341

26 M&A – the UCB Case 343
Georges Jacobs

26.1 A Brief History of UCB – Eight Decades of Mergers, Acquisitions, and Divestments 344

26.2 The Formation of Surface Specialties – A Three-way Integration 346

26.2.1 Phase 1: Plan and Get Going (Dec. 2002 – Jan. 2003) 347

26.2.2 Phase 2: Design and Implement the Organization (February – May 2003) 349

26.2.3 Phase 3: Define Improvement Initiatives (May – September 2003) 351

26.2.4 Phase 4: Implement and Follow Up on Results (October 2003 – December 2004) 352

26.3 The Integration of UCB Pharma and Celltech 353

26.4 Key Learnings 356

26.5 Summary 357

27 The Chemical Industry and Public Perception 359
Wilfried Sahm

27.1 Public Perception of the Chemical Industry – its Structure and Significance 359

27.1.1 What Does the Public Associate with the “Chemical Industry”? 360

27.1.2 What Is the Value of a Good Image for the Chemical Industry? 361

27.1.3 How is the Image of the Chemical Industry Formed? 361

27.2 Image and Acceptance in Germany 362

27.2.1 Credibility in Public Debate 363

27.2.2 The Chemical Industry Viewed as an Economic Factor 364

27.2.3 Value and Responsibility Criteria 365

27.2.4 Acceptance: Yes – But With Strict Controls 366

27.2.5 Insights from the Long-term Trend 367

27.3 Creating Awareness and Acceptance through Communication 369

27.3.1 Joint Advertising and Political Campaigns 369

27.3.2 Dialog Programs and Events 371

27.4 Current Challenges 371

27.4.1 The Industry’s Image in an International Comparison 372

27.4.2 Shaping the Future with New Technologies 373

27.5 Summary 373

28 Industrial Biotech: From Promise to Profit 375
Rolf Bachmann and Jens Riese

28.1 Time to Exploit the Potential 375

28.1.1 Better Technology, Faster Results 377

28.1.2 Environmentally and Balance-sheet Friendly 377

28.1.3 Rekindling Innovation 377

28.1.4 Increasing Corporate Action in all Segments 378

28.2 Waste Biomass – a Feedstock with Mass Appeal 379

28.2.1 How Waste Biomass Works 379

28.2.2 Economic Benefits and Regulation 379

28.2.3 Further Management Action Needed 380

28.3 Turning the Promise into Profit 381

28.3.1 Ascending the Staircase inside the Company 382

28.3.2 Handling External Pressures 382

28.4 Capturing the Value – How it is Done in Practice 383

28.5 Finding the Right Answer 387

28.6 Summary 388

29 Industrial Biotech at DSM: From Concept to Customer 389
Colja Laane and Feike Sijbesma

29.1 From Petro to Bio 389

29.2 From Principle to Product 390

29.2.1 Food, Feed, and Nutritional Ingredients 392

29.2.2 Pharmaceuticals and Fine Chemicals 395

29.3 From Specialties to Commodities 398

29.4 From Innovation to Impact 399

29.5 Summary 401

30 Leveraged Buyout Transactions – Challenges and Learnings 403
Achim Berg, Florian Budde, and Bernd Heinemann

30.1 Chemical Sector LBOs Show No Sign of Abating 403

30.2 Understanding Value Generation in Chemical Buyouts 407

30.2.1 Timing: Three Phases of a Buyout 408

30.2.2 Value Generation Mechanisms 409

30.2.3 Sources of Value Generation 409

30.3 Learnings for the Chemical Industry 410

30.4 Learnings for Buyout Firms 411

30.4.1 Good Deals Are Getting Harder to Find 411

30.4.2 Exiting Through the Right Door 412

30.4.3 Time to Stand Out From the Crowd 414

30.5 Summary 415

31 What Attracts Private Equity Firms to the Chemical Industry? 417
Thomas Jetter

31.1 Chemical Industry Restructuring 418

31.2 Private Equity Transactions in Chemicals – Success Stories, Mostly 419

31.3 The Value Drivers of Private Equity Investments 420

31.3.1 Business Strategy and Operations 420

31.3.2 Financial Market Conditions 423

31.3.3 Aligned Interest of Management Teams and Financial Sponsors 424

31.4 Summary 425

32 Facing China 427
Sönke Bästlein, Ralf Dingeldein, Tomas Koch, and Karsten Neuffer

32.1 China Is No Longer HOptional’ 428

32.2 Most Chemical Companies Are Not up to Speed 430

32.3 The Lessons of Confucius 433

32.3.1 A Good Strategy at Home Wins the Battle a Thousand Miles Away 433

32.3.2 He Who is Close to Water is First to See Reflections 435

32.3.3 When Away from Home, Seek Help from Friends 436

32.3.4 The Sharper Saw Does the Better Job 437

32.4 Summary 440

33 China – Key for Success in Asia 441
Jürgen Hambrecht

33.1 Why China? 441

33.2 BASF and its Long Relationship with China 442

33.2.1 BASF’s First Steps in China 442

33.2.2 The Post-Second World War Era 442

33.2.3 Toward the Future 444

33.3 Sustainable Development in China 447

33.4 Outlook 448

33.5 Summary 449

Index 451

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Author Information

Florian Budde is a Director in the Frankfurt office of McKinsey & Company, Inc. He co-leads the firm's European Chemicals Practice and has served a large number of chemical clients on strategic, organizational, and operational issues, with an emphasis on capital market-oriented corporate strategy. Earlier in his career, he was based in McKinsey's Seoul Office for two years. He holds a PhD in physical chemistry.

Utz-Hellmuth Felcht is Chairman of the Board of Management of Degussa AG and a member of the Board of Management of RAG Aktiengesellschaft, as well as holding a number of other Supervisory Board positions. He also serves as Vice President of the German Chemical Industry Association (VCI) and as a member of the Board of the German Association for Chemical Technology and Biotechnology (DECHEMA e. V.). He has a PhD in chemistry and is an honorary Professor of the University of Munich.

Heiner Frankemölle is a Director of McKinsey & Company, Inc. based in the Cologne office. He leads the firm's Global Chemicals Practice. The main areas of emphasis in his client work are corporate transformation, strategy, M&A, and post-merger management, as well as total operational performance and continuous improvement. He holds a PhD in agricultural economics.
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Reviews

"This reviewer would have been very glad to have had a book such as this, about value creation in the chemical industry, at the start of his industrial career! In this book, which contains 33 chapters written by over 50 authors, the three editors have succeeded in putting together a work on this complex subject that is very readable and easy to understand, even for nonchemists. Of the 54 authors, 35 are from the McKinsey consultancy organization, while 19 are experienced business leaders from the chemical industry. The book can be strongly recommended for everyone who is working in this or a related area, or intends to do so...This is an excellent book, both in its standard of production and especially in its content, and I hope that it will reach a wide readership so long as it remains up-to-date."
Angewandte Chemie


"This comprehensive collection of data and ways of thinking of people, who as non-chemists have an ever increasing influence on the way the chemical industry is managed, is of considerable influence to those, who should provide the basis for the innovations to come, the scientists. Only if members of the two worlds talk to and understand each other, the chemical industry can continue to prosper. It is hoped that this well-conceived book will play its role at this important interface."
Macromolecular Chemistry and Physics
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