Navigating Uncertainty in Global Chemical Markets with Commercial Discipline - Ep 160

Not just because of the markets, although they certainly seem to be doing better this year than they were a year ago. But also because of the actions that companies have taken to be more resilient in these flat, challenging, foggy, and uncertain markets. We're in the early days of the first quarter earnings reporting season. Ooh, that's a tongue twister and it's a little too soon to tell, but some of the early reports are better than expected.

And frankly, I expect some to be worse than expected. Um, the focus for this episode is on the strategic actions needed to ensure business resilience. During uncertain markets. Now this is a repackaging of episodes 120, 122, and 124 that I recorded recorded. Um, mid-year last year. When it was really apparent that there was a downturn in markets and companies were struggling and really needed to revisit their playbooks. And to ensure business resilience and longevity.

Well, it is clear that some companies have done very well with this commercial discipline playbook. And others are still working to execute a few more plays.. So based on the discussions I've been having with folks recently, I thought it's a time to bring this back, um, and to focus in on these elements that's critical for companies to continue to take here in 2024.

And so what you're going to hear is a replay of three episodes that were separate episodes back in last year, we've combined them into one this year. And the three elements that companies are really focusing on is number one, commercial discipline. And we talk about how commercial discipline and those elements of commercial discipline that companies are using to drive business resilience. The second aspect is customer centricity.

And what I define as true customer centricity, not to be confused with customer satisfaction and oh, let me just keep my customers happy. No, it is really about driving true customer centricity, which is finding value for yourself and your customers and figuring out where the most valuable partnerships and opportunities are to ensure that business resilience and longevity. The third is diversification of customers and markets. And this is a play in the playbook that I see continuing to happen.

In fact, recently I met with a couple of companies who talked about the fact that they are seeking new markets that they are developing and growing into new markets. One to manage the, the current market narrative, not just short-term, but long-term. And also just to build this long-term resilience. That's what we're covering today is those three aspects. If you want a download on commercial discipline best practices, we've developed a great download for you.

Visit the show notes where there's a download link and you can get that information. And if you have any questions, again, just reach out. You can shoot me a DM. You can leave me a message on LinkedIn and we'll respond to get back to you. Now., onto today's episode. In episode 118, I shared Some insights from the second quarter, 2023 chemical earnings reports.

In that episode, I talked about kind of the themes that came through, which were flat markets due to inventory, de stocking sluggish economies and overproduction in some markets. And also highlighted three approaches that companies are taking to create business resilience in these markets. Those three approaches include commercial discipline.

Customer centricity and diversification of markets and customers I'm going to be unpacking these approaches and sharing the approaches that leading companies are following. Commercial discipline. It means different things to different people in different companies. And so I thought it was useful to unpack some of those approaches that companies are taking that maybe your company is taking, or maybe it needs to. Get a little bit more focused in taking.

During a down economy, companies often face challenges, and we've seen this chemical companies are facing challenges that require them to implement various strategies to help support business resilience for today and for the future. Applying commercial discipline involves making really informed and strategic decisions to optimize resources, control costs, and maintain strong market positions.

And, you know, I talked about this in episode one 18 and it came through in a couple of earnings reports that I referenced, control what you can control. So to me, it's Some of this aspect of commercial discipline, as we see companies implementing it, is about control, controlling what you can control and clarity. And I'm going to get into that a little bit more as we go along here.

So here are several ways that companies I've talked with are applying commercial discipline to create business resilience in a down economy. First of all, Cost optimization. I mean, this is a play playbook that we often hear. Companies focus really on identifying where they can control costs, um, and reduce costs without compromising essential functions without compromising their customers.

Um, sometimes this involves maybe renegotiating contracts, streamlining operations, eliminating unnecessary expenses. To me, this is really about clarity on value. Cost optimization is not just about controlling costs. It's about controlling the right costs. How do you know they're the right costs? Because you understand the value that you're realizing as a business with your customers and in your bigger picture for your strategy. The second piece of this is clarity on costs.

Um, and And it's really, when we talk about getting clear on your costs and getting that clarity, it involves getting to the real and the actual, not just using rules of thumb and assumptions. So one of the things I've talked with a leader recently, we talked about, um, margin management and getting really crystal clear on cost management and margin management. And in the particular instance, it was really about, um, moving from assumptions.

In some of their cost basis, particularly in areas of logistics and transportation, where a number maybe got assessed for the whole year and plugged into the S. A. P. system. And then you're managing against that using standard rates. It is a simplification. Simplifications are awesome.

And so many times, however, when you're really getting disciplined about your costs, when you have to get commercially disciplined to deal with these flat markets that we're seeing, you have to go beyond those simple rules of thumb. So getting more current with their real costs. The other thing I hear from leaders, and I hear this from business leaders who are You know, making decisions around pricing and margins, they are sometimes lagging.

Their financial people, their finance analysts, or whomever is providing some of those cost data to them, um, are often lagging. Um, again, making assumptions using old data, um, around manufacturing costs, production costs, sales costs, what have you, when your information is. Not current, or when you're using rules of thumb, um, it is really difficult to effectively manage margins to set your prices, to reach your target margins and EBITDAs.

Um, And, and get the business performance that you want without understanding those actuals. So my second point here is clarity on costs is critical and is a critical element of commercial discipline. The third piece is cashflow management. I think these one, two, three go together by the way. So you know, one cost optimization, two clarity on costs. Because it's tough to optimize if you're not clear. Um, the third is cashflow and cash is King. Um, I've said this before.

You've heard this in other places. This involves really better control of invoicing collections and payments, right? I think that's where we often see this cash generation engine. I'm also hearing the pros and cons of this, right? So I talked to a leader recently who, who basically said there. Some of their customers have gotten extraordinarily nitpicky on invoices, right? So, there's a typo, there's something wrong and kicking it back to the beginning. So it's, it's delay.

It's a strategic delay of invoice payment and processing to manage costs and cashflow. But it's also frankly, this goes on both sides of the equation, cashflow managing invoices, managing payables and managing where your cash is going is really critical. Hopefully you're doing it in a way that quite frankly is respectful of your business partners, customers and suppliers because everybody's in the same boat. I've seen it.

You guys have seen it sometimes that the, you know, the 800 pound gorilla, if you want to use that term often has better and more stringent control on some of this cashflow management. But it's across the value chain, right? So cashflow management is critical. The fourth thing is business efficiency and optimization. So this falls into a couple of different categories. One is just automating and streamlining processes.

So I have talked to a number of leaders who have said, we have, we are taking a really hard look at our business processes, making sure that they are streamlined and efficient. Again, one, why it takes costs and time out of the system, right? So time is one of these things that's. actually quite costly. But it's also the right way to do business.

It allows you to be more efficient with your, your people with your finances, with your production and how you're moving products to and fro with your customers. So automating and streamlining processes, one element of this business efficiency. Optimizing supply chains, right? I think that's something that always happens. Taking a sharper look when you have clarity, as we already talked about clarity on what those real supply chain costs are, you're able to better effectively optimize.

So that's one of these elements. And then the other pieces of aligning business systems. So I've heard from several leaders recently that they are taking this time when business is a little bit slower. They are taking this time to really align and combine business systems. This is particularly true of companies that have, formed through mergers, um, and maybe are operating several business systems.

When you look at the activities of 2020, 21, 22, they were running and gunning, moving fast, didn't necessarily have time to focus in on business systems and business processes and efficiencies because they were serving customers and serving their business needs while there was that opportunity.

As things slow down, they've taken that time and one leader in particular said, you know, we're working on inter internal processes and getting that fixed, slowing down so that when the market speed up, we can go fast, right? So that whole concept of slow down, fix it, and then go fast is absolutely. Essential and it's a critical part of this business efficiency and optimization and one element of commercial discipline that we're seeing.

The fifth thing that I'm going to touch on and the final thing I'm really touching on today is around prioritizing and optimizing products and solutions, getting clear. So clarity on the most profitable products, services, and solutions that you're able to offer. So this aligns with two of those other topics we're going to be talking about which is customer centricity and diversification.

So, you know, we're going to be getting into more depth there because obviously when you're prioritizing and optimizing on your best, and I'm going to use that term loosely and it gets defined differently in different places. Um, but when you're optimizing on that, you can't do it in a bubble.

You have to do it in the context of your markets and your customers and the rest of the value that you bringing, but figuring out what those best or optimal products and services are and selling more of them. Is critical cutting the dead weight, right? So there are, we all know this in our business businesses, there are products and services that are. Um, less optimal that are not as profitable, not as effective.

Um, and it's tempting, I will say in a down market, it is really tempting to do everything for everyone. Ooh, can you make this product? Sure. Can you do this service? Sure. However, commercial discipline basically involves saying no more often. Right. Um, you are really focused in on making the right decisions for your business, for your profits, for your people, for your customers and your suppliers.

And that involves this whole aspect of prioritizing and optimizing products and solutions, cutting the dead weight, saying no, rather than saying yes to things that are suboptimal. Um, so those are my five things applying commercial discipline requires a combination of short term cost cutting, margin. Maximization measures. Why? That's a triple M's there as well as long term strategic planning. So right. So you've got to look short term and long term at the same time.

Companies are really focused on effectively balancing those aspects. Okay. Customer centricity. What. Is it? Customer centricity is often confused with customer service and it aligns with customer experience. The reality is there is not one common definition. Gartner says customer centricity demands that the customer is the focal point of all decisions related to delivering products, services, and experiences to create customer satisfaction, loyalty, and advocacy. Oh, that's a long definition.

I actually like to tighten this up because the reality is this is not about all customers or rather all customers are not created equal. And in fact, Wharton professor Peter Faber, who wrote a book called customer centricity, I'll link to it in the show notes. What he says is customer centricity is about focusing on the right customers to create strategic value. As I like to say, you can't be everything to everyone, right? So companies that try to be everything to everyone.

It is a slow and painful, maybe not a death, but certainly not reaching the standards of business performance and business resilience you want, right? So you have to be able to say, no, you can't be everything to everyone. Customer satisfaction doesn't pay the bills, right? So again, customer centricity is not necessarily about having a high customer satisfaction score.

You can have an amazingly high customer satisfaction score and have no customers or have very few customers and not not getting the right profitability, not getting the right value out of those customer relationships. So really customer centricity is really about serving the right customers. In the right way with the right products and services at the right time.

One of the things that stood out in those second quarter 23 earnings reports and this came from Eastman CEO, Mark Costa, he, one of the comments he made in that report was we continue to benefit. From momentum in our premium products and markets, right? And the subtext in that as well is recognizing that those products are going to the customers that value them. And customer centricity is a whole lot about understanding and matching what you do.

And how you serve your customers and putting the right customers at the center of your business. So key elements in this, you know, I actually think this is not an overnight exercise, right? So this is a journey that takes a couple of years really to get right. And part of this first piece is just phase one. I call part of discovering and understanding, right?

The elements that that really you can focus in on when you're thinking about customer centricity and dry using it to drive business resilience. So first of all, customer lifetime value. Which is really the value that business relationships have over time. So, you know, thinking about value, I really think about this in terms of margin and growth and kind of the overall value you're getting with your business. You can measure it a couple of different ways. It is really forward looking, right?

So if we think about. Projects, capital projects, innovations, et cetera. When you start looking back at sunk costs, some costs don't matter. I hate to say this, but in many ways that sunk business relationship, the relationship that's behind you, it matters, but it's not the primary focus. It is one element of assessing customer lifetime value. Customer lifetime value is forward looking, right?

You are recognizing the value of that company of the business leader being okay with some ups and downs, right? Because we've seen in these last few years, there's been some great highs. There's been some great lows in business across the chemical industry. But it's really about looking at value, looking at cost to serve this customer and this relationship.

Not just really in the ways that we sometimes think about it, which would be the cost of goods sold and just raw materials and looking at just a pure profit margin. But it's also resources, time, logistics, labs, innovation, understanding the value. And you know what, the value equation is two way. Let's be clear about that value is never just one way. It is two way and your customer lifetime value in thinking about.

Those customers, your most strategic customers that create the most value for you and together you for them is critical and customer centricity involves understanding the right customers. Customer lifetime value is one way of doing that. The second piece of this is around strategic alignment, right? So that also aligns with customer lifetime value, but the value that you, companies that are strategically aligned to you. Value you and your services more. You are aligned in long term objectives.

You're aligned in the ways of doing business, your strategies around growth, around customers, around markets, around other elements of your business are aligned. You have strategic alignment. Companies that you have strategic alignment with, they're better. Quite possibly a, one of your, you know, right customers, right.

That you want to align to the third piece of customer centricity and really in this discovery phase of figuring out who are your key customers that need to be at that center of your business, um, segmentation and ensuring that you're doing the right things for the right customers. I actually talked a lot about segmentation and personalization in episode 110. If you haven't listened, go back and listen.

We'll also link it to the show notes, but segmentation is critical because when you're using customer centricity and driving your business to creating a higher level of customer experience, a higher level of customer value, You need to know which segments of your customers are you achieving that with and are achieving that with you. And then the fourth thing really ties in with employee buy in.

And I actually, I've lumped this here in my phase one discovery and the reality is this becomes of your part of your design and definition. Once you understand right, customer lifetime value, strategic alignment, your segmentation, you're able to take the next step and say, okay, now what? Who are the right customers that we need to put at the center of our business that drive the greatest strategic value? And again, I think of it like a bullseye target.

You're not necessarily getting rid of customers, but you are understanding the most valuable premium customers, greatest customer lifetime value, and ensuring that you're getting the That you are serving them appropriately. When you think about your next year of customers, you might be serving them a little bit differently, right? So driving customer satisfaction, doing the right things for the right customers, being customer centric and putting your customers at the center.

Of your business processes, your customer activities, but also prioritizing them, right? I'm going to go back to what Mark Costa said Eastman CEO, Mark Costa said, which is around, we continue to benefit from momentum in our premium products and markets. Customer centricity is key. I've heard this from a number of leaders. Customer and centricity is one of those key levers that we have to exercise.

Um, you know, being customer centric requires clear understanding, strategy, decisions about your approach to customers, the customer experience and customer value, being the right supplier to the right customer at the right time. Today. I am talking about market and customer diversification and its role in creating business resilience during flat and inflationary markets.

The events of the last three years have really highlighted the need for diversification, whether it be in your customer base, the End use markets, you're selling into geographic locations that you are, your customers are in, or your suppliers are in. And in fact, even just supplier diversification, just like we talk about in financial markets. And if you guys are investors and you're looking at your financial portfolios, diversification has long been critical.

The same is true with chemical companies and across the chemical industry. So, Let's talk a little bit about just what is diversification? Diversification is really when companies change or expands their products, offerings, markets, both end use and geographic. And it was really first noted in the 1950s as one of four critical growth strategies by Igor Ansov, who's a mathematician and business manager. And if you want to go learn more about him and his theories, you can do so.

Find a link and add it to the show notes. Often. It's interesting. He viewed it in a pretty narrow connotation, which I kind of find interesting and ironic because to me, diversification is about growing the pie, expanding your opportunity base. And yet he often talked a lot about products and services. I personally think it's really appropriate to think about diversification in the sense of geographies, manufacturing locations, your supplier base, your customer base, and more.

Now, the reality is diversification is not a quick exercise. When you're thinking about diversifying your manufacturing locations, To create better resilience, better cost basis, et cetera. That's something that takes a couple of years to implement depending on the products and that you are servicing and the customers and suppliers you've got.

And when I talk to leaders about business performance over the past year, some of the benefits of diversification are deeply rooted in the business decisions they've Already taken case in point in a global business leader at a leading materials company that I've spoken with has stated her business and her part of the business is rocking this year. Great performance, sales, exceeding expectations, consistent growth, which is a great counterbalance to her.

Colleagues business, which focuses in a different market area, in his case, supplying products that go into a medical fields and medical applications, which is not meeting business plan. So from a leadership perspective, that diversification of. End uses of markets is really successful because when one business is doing great and the other business is not doing great, it provides balance.

And that's certainly what we've really seen over the past year and really in many ways over the past three years, because the pandemic, the supply chain disruptions we've seen as a result of that, as a result of the Russia Ukraine war, as a result of. Energy prices as a result of what China is and isn't doing has really driven the need for better diversification and manifesting those results. Why do companies diversify?

Number one, to beat the competition, doing something that the competition isn't doing so that they get a step ahead. Growing profits. And I think at the end of the day, every company exists to grow its profits, um, exists to create. greater value for its shareholders, as well as its employees and its customers and its business partners. It provides strength during downturns.

And that's really the focus of where this highlight of the benefit of diversification of markets and customers and how companies are seeing real resilience in these flat and rocky times. Thank you. It's critical, right? It provides strength. It provides resiliency. And the fourth reason is really around navigating industry changes. There is no doubt in my mind, there's no doubt in your mind that the chemical industry, our customers, the markets that we sell into, consumer demand.

Is changing as a result of economic shifts, as a result of net zero sustainability and ESG, which is driving us towards greater diversification away from perhaps some of the traditional chemical feedstocks that we typically see flowing through the value chain into more green and natural and sustainable products. How do we take advantage of diversification from where you are today and where you're going forward is really number one, assessing where that market is going.

Where does your business fit in the future markets? Companies create success with flexibility. It's not about being everything to everyone. I've talked about that before. You're not going to be diversified to the point where it's disparate and it doesn't make sense. And in fact, the best opportunity for diversification, I like to think of it as a Venn diagram, right? So you guys are familiar with the Venn diagram where there's the.

Two circles, let's just say market a market B and where the overlap is. You want to have overlap and synchronicity in your diversification because otherwise you're just assembling a business and a company that requires double the resources, double the products, double the efforts. And Effective diversification is linked linkages to existing products, linkages to existing markets and seeking out the greater opportunities.

So you know, and this comes in supplier diversification, I've touched on that a little bit, customer diversification, right? So understanding what customer finds value. In your products, in your services, in your offerings and figuring out, well, what are the parallel markets that then find value in the same things and going after it, extending your reach and diversifying where you're going and geographies.

So I think we're in a real interesting time right now, especially from a geographic diversification. The signs indicate that we are maybe shifting to more regional supply chains. which implies more regional business models. So you would say, does diversification still hold true? Yes and no. And it really depends on products, right? What we're seeing is that some businesses are a more local business and understanding where your local businesses are and how they tie together is critical.

Global businesses, um, have a greater reliance on global markets, global suppliers. That's not always a great thing. Putting all your eggs in one basket in terms of where you're sourcing in terms of where you're selling creates risk and less business resilience.

For me, this, this aspect of diversification and where companies are really finding value is when they are Taking the business they have today and looking at what's successful and then finding out the customers in the markets and the business opportunities that extend, that diversify so that they're not relying on the same basis and that take them to the new place. So that's it. This is a quick and easy snapshot of the benefits of diversification.

There you have it folks, the three elements to ensure resilient companies and resilient businesses. They were true. In 2023 there too in 2024. And frankly they're true in pretty much all markets. Um, and those three things are commercial discipline. True customer centricity. And diversification of customers and markets. So I hope you enjoy today's episode. Leave me a message on LinkedIn. Go ahead and rate and review. If you are not currently subscribing to the chemical show, do it.

Um, if you're on a. If you're on YouTube, I'm going to tell you to smash the subscribe button because that's apparently what I'm supposed to do. Um, and if you listen on apple, Spotify, or another podcast player, make sure you're subscribing because that is the way to ensure that you get the latest and greatest, as soon as we publish it. Um, remember we've got a great download for you today on commercial discipline. Best practices. The link is in the show notes.

The link is also on this episode page on the chemical show.com. And thanks for listening today. Keep listening, keep following, keep sharing. And we will talk with you again soon.