Strategic cost reduction in chemicals: not about cutting back yesterday’s legacy – but building something new for tomorrow

02 April 2015

Imagine the scene. You’re the CEO of a well-established bulk chemicals business, and you’re sitting down to plan out your next strategic cost reduction programme. To get started, you take a blank sheet of paper and begin to draw.

What’s the first thing you fill in? Most people might think the answer is your current organisational model, with the various cost centres clearly marked out. However, if you take that approach, the cost reduction programme that you end up with won’t be strategic. It’ll be tactical.

Instead, the starting-point for a truly strategic cost programme has to be your strategic drivers: what your customers value, what they’re looking to you to deliver, and the scope of your ambition in meeting those requirements. Only with a clear view of these drivers can you define the products and services, capabilities, channels and intermediaries that you’ll need. And only then can you design the right operating model – including the appropriate cost base – to deliver your strategic ambition, today and into the future.

If all this sounds like a radical step for a chemicals business, that’s because it needs to be. The chemicals industry has moved from a world of regular seven-year cycles into an increasingly unpredictable environment dominated by the irresistible and sustained power of the global megatrends, ranging from demographic change to resource scarcity to headlong technological advances.

Put simply, the world – and its customers– have changed for ever. Chemical companies’ business model, operating model and strategy need to change too. And a vital imperative for operating successfully in this altered world is a new approach to cost control and reduction.

What kind of approach am I advocating? Well, when it comes to shrinking the cost base, chemical businesses have four main levers they can pull. They can do without, do better, do less, and do differently.

The first two approaches play to traditional tactical cost reduction, imposed top-down. ‘Doing without’ is things like cutting headcount and paring back discretionary spend. ‘Doing better’ might involve process simplification and improvement initiatives.

In contrast, options three and four – ‘doing less’ and ‘doing differently’ – are inherently strategic. Why? Because they require going back to customers’ view of value and the business’s ambition, and building upwards from there. This means asking what the business needs to be, how it can get there, and what it requires to deliver its ambition operationally. Which may well be things like extending up the value chain, working more closely and collaboratively with customers, or segmenting the product portfolio in a more targeted way.

The message is clear. A truly strategic cost reduction programmes will do much more than reduce costs. It’s a golden opportunity to refresh the business’s operating model, clarify and refocus its ambition, and deliver the value that today’s customers now demand. And if it’s done well, it’ll help to create a business that’s not just striving to sweat yesterday’s assets – but is designed and built from ground up to be fit and agile for tomorrow’s challenges.

Adrian O'Shea | Director, Consulting
Email | +44 (0) 113 289 4657

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