A comprehensive guide to reinventing companies Mastering the Transformation Journey 2015 THINK ACT BEYOND MAINSTREAM July 2016 Master the maze Formulating a winning digital strategy in chemicalsTHE BIG 3 2 THINK ACT Master the maze DISCOVER YOUR DIGITAL ESSENCE P . 11 4.0 The chemicals industry has entered a new age in which digitization is one of the driving forces. Welcome to Chemicals 4.0. Page 4 59% of chemical companies recognize the importance of digitization for their business. Yet half of all respondents say that they are not in a position to address this potential. Page 3 65% One company achieved 65% growth in its market value in just five years, partly thanks to its early mover strategy on digital. Page 7THINK ACT Master the maze 3 Digitization. The word seems to be on everyone's lips, from market pundits to industry thought leaders. But what does it actually mean in practice? Rather than a homogeneous set of new technolo- gies, digitization is the coming together of different approaches that open up new possibilities. Big Data, neural networks, diagnostic algorithms, customer be- havior tracking, word streaming, community creation, cloud sourcing. A giddying collection of “new“ capabil- ities that turn 21-year-olds into billionaires and leave many executives in the chemicals industry wondering whether something fundamental is happening to the asset-intensive industry that they used to know. In this paper we set out a framework to help you think through your approach to digital. In a recent sur- vey we found that almost 60% of chemical companies recognize their need for a digital strategy. But half of the respondents also acknowledged that they did not have the capabilities necessary to think through the problem and to link the agenda to their overall busi- ness strategy. We call this paper “Mastering the maze“ because we see a basic conundrum facing executives. Dismiss- ing digital as just hype is incredibly tempting in the world of chemicals, yield, asset utilization, working capital management, and pricing are the essential disciplines and mastery of these leads to success. Uber, Google, Facebook, and eBay are interesting, but it is difficult to draw meaningful parallels to the es- sence of process industries. Yet the nagging thought abides: Is there hidden value here that I have yet to discover? Digitization has the potential to disrupt every part of the value chain. Y et most chemical companies are struggling to master the digital maze. Cover photo: Sergey Nivens/FotoliaTHINK ACT Master the maze 4 In an industry of the size and potential of chemicals, it's not surprising that the radical breakthrough rep- resented by all things digital is generating a mass of hype. The chemicals industry is currently worth an estimated EUR 2.3 trillion and that could potentially grow to a staggering EUR 5.6 trillion by 2035. In our recent THINK:ACT study Chemicals 2035 Gearing up for growth we explore how the industry has passed through a series of different cycles over the years. Having experienced a period dominated by mergers and acquisitions in the field of life science, we believe that the chemicals industry is now entering the age of digitization. Innovations are springing up at every turn: cheap sensors that constantly monitor product qualities, precision agriculture, 3D printing, digital tools in sales and to create even more transparency on market price data, predictive analytics in areas such as maintenance. By analogy with Industry 4.0 the fourth industrial revolution we call this new age Chemicals 4.0. With its dramatic implications for the competi- tive industry landscape, digitization has made it firmly onto the agenda of most CEOs in the chemi- cals industry. An examination of the number of refer- ences to digital topics in the 2015 annual reports of sample companies proves to be true. Industry leaders recognize that digital technologies have the potential to drastically transform the value chain, from R Agrochemicals; Construction chemicals; Personal care chemicals Players that have undergone successful restructuring or transformation Large integrated players Highly focused specialty chemical players Focused specialty chemical players 70% PROXIMITY TO END MARKETS REVOLUTIONARY 20% 10% DIGITAL TRANSFORMATION APPROACHES First revolutionary business models emerging in distribution Petrochemicals Basic chemicals Polymers Special segments 1 A B CTHINK ACT Master the maze 9 THE ROLAND BERGER DIGITAL TRANSFORMATION APPROACH How can companies turn themselves into skillful two-handed players? We have devised an effective three-stage Digital Transformation Approach for chem- ical companies to define a clear vision and execute a digital agenda for their business. It enables players to chart a path through the digital maze. STAGE 1: Define your Business Essence and develop a future vision for your end markets. This stage involves defining your core competencies in relation to the needs of your market, drawing up future scenarios for digitization with regard to in- dustry trends, evolving customer needs, competitor behavior and key technologies, and integrating the customer's voice and perspective. The deliverables are a map of your core competencies and a picture of the agreed future scenario or scenarios in your end markets. We call this map of core competencies your Business Essence. Business Essence describes a set of com- bined or “stacked“ core competencies that is diffi- cult to replicate, creating a basis for sustainable competitive advantage (for more discussion on this concept, see Know Thyself Delivering profitable growth The elusive frontier: Part 1). We use Busi- ness Essence as a tool at the start of our corporate and growth strategy process to help develop a com- mon understanding across the organization of the firm's capabilities that help create, capture, and de- fend value. Business Essence is central in the digital context because it helps firms focus their capital resources on efforts that enhance their existing competencies or address their competency gaps. It gives their digi- tal efforts strategic intent. Furthermore, it ensures that the potential extension of the product portfolio or value chain participation through digitization is in line with the company's business model. Discover your Digital Essence. This is what enables you to identify value pockets and find a path through the digital maze.