New Markets, New Approaches - Opportunity still abounds for chemical distributors to win more business, as chemical producers look to them to provide ever more sophisticated and differentiated services. The chemical industry used to drive growth by inventing breakthrough molecules and new products, which companies were able to develop into large sales and profit generators. However, the ability to drive growth from new molecules per se seems to be tailing off, yielding increasingly marginal and incremental growth rather than the breakthroughs seen in previous decades.

In comparison, the customer interface, new approaches to customers in mature and emerging markets, as well as integration of end-to-end distribution and marketing capabilities, are likely to offer a richer seam of opportunity based on two main growth drivers: emerging markets and new approaches to customers.

The shift in economic growth to emerging markets has led to demand growth across all chemical product categories. The demand for chemicals tends to increase at a rate slightly above gross domestic product (GDP) because the greater use of chemicals drives industrial productivity and the performance of end-products. As a result, gross trade (that is, the sum of exports and imports) in chemicals has grown on average by 10 % a year between 2000 and 2011.

In particular, high growth markets exhibit correspondingly high trade growth rates. For example, gross trade in chemicals in China grew by more than 13 %, with imports expanding by 16 % and exports by close to 14 % each year.

On a customer level, the definition of distribution and supply chain offerings and their integration with marketing can create innovative propositions, point of sale interactions or two-way customer dialogues. Speed and precise timing of delivery, additional information including digital support and customized interactions are increasingly important buying criteria for customers, and are therefore critical sources of growth for chemicals manufacturers.

Building a Competitive Advantage

Leading chemicals manufacturers are increasing their emphasis on differentiated services and go-to-market propositions as a way to build competitive advantage. This is in contrast to the default position of simply turning to third-party distributors.
Third-party distributors have responded to the opportunities presented in new markets by accelerating their growth through acquisitions in emerging markets, and by building global sourcing and distribution capabilities.

As industries in emerging markets tend to be more fragmented, with a greater number of smaller companies compared with the more mature and consolidated industries in developed markets, creating the right distribution capabilities can be a challenge. To date, chemicals manufacturers have pursued a mixed approach that combines their own and third-party distributor resources. However, to capture the full potential for growth from distribution activities, chemical manufacturers need to address some key challenges.
A number of sizeable barriers prevent chemical businesses from seizing the growth opportunities that distribution presents. But few, if any of them, are imposed by external constraints.

At the highest level, there is a lack of senior management attention to distribution's potential. The prevailing perception is that distribution is a cost to be managed, rather than a decisive growth driver.
This is typically linked to a static view of markets, customer industries and customers and a reactive approach to emerging growth areas.
Last but not least on the operational level, the lack of management attention leads to gaps in operating models, typically caused by a lack of process optimization and of undifferentiated services.

In response, we see a clear trend developing whereby leading chemicals manufacturers will begin to address these barriers, and in doing so, start to realize the potential of distribution to deliver growth.
Chemical manufacturers still largely treat distribution as a cost to be managed rather than a potential source of top-line growth. On the other hand, leading third-party distributors pursue growth strategies comprising organic investments and acquisitions. But, by far, the largest proportion of revenues and customer interactions are handled directly by chemicals manufacturers.

While third-party distributors have grown their market share over the past few years, it is still the case that 90 % of distribution is managed in-house. Chemical majors have significant global investments in storage, logistics, marketing and sales. But they need to change the way they think about their distribution activities and exploit these assets more effectively.

Today's typical management approach to smaller customers and products is often to transfer them to a third-party distributor owing to their perceived lack of profitability. In doing so they may be missing valuable opportunities to interact effectively, shape new product and service propositions and get closer to their customers to generate value.

Shifting Models For Growth

The root cause of insufficient profitability is often the lack of detailed attention paid to process optimization and system support. It is noticeable that leading companies such as Germany's BASF and U.S.-based Dow Chemical have invested in process and system optimizations to enable better multichannel management and the provision of profitable offerings for small customers and small products.

That means, for example, focusing on the speed and precision of delivery, optimizing complexity of products and bundles and offering customers efficient delivery volumes. Delivery and offering capabilities like these will also become increasingly important as emerging markets are becoming more and more important for growth.

The shift in demand growth from developed to emerging markets requires distribution capabilities to compete for new business opportunities in those territories. Very often chemicals manufacturers use third-party distributors to enter these markets, as their distribution, marketing and sales capabilities are not sufficiently optimized to support a market entry by in-house resources.

However, this approach may act to slow down the development of the required business territory and customer intelligence, as developing management attention and two-way customer interactions need to go through an additional interface between third-party distributors and chemicals manufacturers.

Acting On Market Opportunities

More agile, flexible and responsive operating models are also a prerequisite for reacting quickly to market changes and resulting new opportunities. For example, rising oil prices increase the use of oil field chemicals to squeeze out incremental oil volumes from existing wells and open up growth opportunities for oil field chemical providers. To capture these benefits requires both market intelligence and the ability to respond to opportunities rapidly, along with the operational ability to assemble and deliver the right formulations and product portfolios.

Achieving that agility involves a combination of information and intelligence as well as process excellence to address new opportunities quickly and on a global level. In that way, chemical makers will be able to respond to opportunities with capabilities to ship the right product to the right customer at the right time.

Determining Winners And Losers

Driving value from distribution requires a change from a cost-focused to a growth-driven view of distribution and the implementation of agile operating models, typically with a cross-functional alignment of marketing and supply chain. Shaping the required organizational interfaces and processes are decisive to accelerate growth and move beyond the traditional functional silos in, for example, marketing, distribution and supply chain.

Identifying how to respond to customer needs and having the capabilities in place across the supply chain will become ever more important, particularly in emerging markets. The small- and medium-sized businesses in those markets today could well be the large and highly profitable customers of tomorrow.
Chemical businesses need to assess the optimal route and timing to building their distribution assets and personnel for those markets in order to capture the growth they undoubtedly represent. As they do so, it will be their ability to implement efficient and customer-focused distribution that will increasingly differentiate the winners from the losers.