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Analysis

Digital opportunities for chemical enterprises

Industry 4.0: How technology will create lasting value

​The chemical industry is going digital. Backed by new digital capabilities, chemical companies are now better equipped to develop and produce more effective and efficient solutions. How can they fully take advantage of these new opportunities?

​Finding the right digital strategy

Aided and enabled by digital technologies, the chemical industry is poised to create more sustainable products with a lower environmental impact. The chemical industry will likely be at the heart of making cities more effective and efficient, meeting increased global demand for energy and food, and developing new technologies that will be central to the next generation of consumer and transportation products. But could chemical enterprises be doing more?

Whether as a catalyst for disruption or a potential source of future revenue streams, a properly designed and deployed digital strategy may represent one of the biggest opportunities ever for the chemical industry, especially when it's driven by a clear business strategy. Finding the proper strategy is key, especially given the new business models that the advent of digital technologies will bring to the industry. The diversity of options available means finding the proper strategy is most effectively done by adopting an agile culture.

Whether as a catalyst for disruption or a potential source of future revenue streams, a properly designed and deployed digital strategy may represent one of the biggest opportunities ever for the chemical industry.

​Key questions leaders should be asking

Adopting digital technologies will likely create a stronger relationship among chemical companies, their customers, and end markets. Nonetheless, this doesn't take away the distinctiveness of a given chemical company depending on its business configuration, proximity to end markets, capabilities, and outside influences.

The key questions for a chemical company's management to ask are whether they're optimally positioned and configured to take full advantage of the digital opportunity and how far it can go by tapping into the adjacent, emerging ecosystems. In deciding where to play and how to win, there are a host of other questions to ask, including:

  • Where on the value chain and ecosystem do digital offerings allow the chemical enterprise to participate?
  • How might digital initiatives change existing customer relationships and help build new ones?
  • Where can digital capabilities strengthen and extend the company’s value proposition to customers?
  • What key technologies, offerings, and profit models will increase the enterprise’s differentiation advantage?
  • Which new capabilities (data science, marketing, consumer awareness/engagement, multidisciplinary science, etc.) are needed to support lasting value creation?
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Making the case for digital investments

Historically, the chemical industry has improved performance by making investments and acquiring assets with growth opportunities. The question is how to use this advantageous position to create value. Traditionally, the answer is either by adding new capacity, acquiring new companies, or driving innovation. But each brings its own challenges.

Mergers and acquisitions (M&A) have limitations. There has been significant M&A activity over the past few years, boosting chemical companies' valuations. So it's sometimes difficult for chemical companies to identify acquisition targets that align with their portfolios and growth aspirations at justifiable valuations. Additionally, large and complex M&A transactions often require a significant amount of management time and focus to properly integrate acquisitions and achieve the value of the deal. It can be argued that such management time and effort may be better focused on other organic initiatives to grow shareholder value.

What about investing in more research and development (R&D)? While R&D offers intrinsic long-term value, R&D investments compete with short-term operational investments required to survive during times of uncertainty. The gap between the short-term and long-term value generation may be bridged by better aligning R&D with other functions, leading to improved efficiency and effectiveness.

But digital initiatives present a significant opportunity to chemical manufacturers across sectors. On a small scale, digital technologies have been a unique catalyst to rally a company's value creation. Some companies are beginning to make large digital investments in response to changing environmental regulations, the rapid introduction of new technologies, and the shift in consumer preferences and needs. These opportunities are changing the basis for competition in the chemical industry and are creating new, strategically distinct segments that differ from the traditional model of producing and selling chemicals.

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Taking the digital plunge

​Before taking the digital plunge, chemical enterprises can ask themselves what best suits their business when it comes to driving value creation. What role will customers, data, and platforms play in extending competitive advantage? And how can they improve existing business and operating models?

Chemical companies should also consider different combinations of digital levers. A one-size-fits-all approach won't work in today's dynamic environment. A little experimentation with radically different digital designs—with varying emphasis on innovation, differentiation, or capturing more value—can yield unexpected, positive benefits in the long term. In this regard, chemical enterprises can capitalize on digital innovation laboratories to test in smaller geographies before a global rollout and test with key customers by involving them early in the development process.

The time is right for chemical enterprises to begin their journey. They need to keep redefining and retesting their strategic choices, leveraging digital technologies to innovate. To count on continued product and service breakthroughs, companies must embed digital technologies in the entire organization as a core capability. This means transforming the entire chemical enterprise with a clear definition of the strategy, the role of digital technologies, the approach to innovation, the incorporation of appropriate organizational and talent models, and relevant business metrics and individual incentives.

To read the full report, download Digital opportunities for the chemical industry enterprises: Creating lasting value.

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