This article originally appeared on Forbes.com.
As growth slows in developed markets, executives in the chemical sector may be tempted to enter markets showing rapid growth or higher profit margins. However, they may underestimate the challenge of entering new markets or discover that by the time they have built the necessary capabilities, economics have changed and hot markets may have cooled.
So it should be reassuring to those looking for growth that great strategy is more important than hot markets. Research by Bain & Company across industries finds that investing to outperform in a company's core delivers stronger results than expanding into new markets. In most industries, one or two players capture about 80% of the economic profit pool. As a result, even in less attractive markets, the best companies can outperform their cost of capital.
This pattern holds true in chemicals: The highest-performing commodity chemical companies grew total shareholder returns by at least 50% more than the average specialty company over 10 years. We find winners in every subsector of chemicals, demonstrating that it's more about what you do than where you do it.
Bain research also finds that among the three major strategies in chemicals—low cost, differentiated products or exceptional service—no single strategy is inherently better than the others. Winners emerge with each model, and margins of outperformers are similar across the board. However, companies get there in different ways, based on choices executives make in allocating resources. Low-cost providers can tolerate lower gross margins, as they will closely manage R&D and sales costs. On the other hand, a differentiated product provider will invest more in R&D with the expectation of capturing higher gross margins, which in turn fuels more R&D.
There is no single right way to deliver against any of these strategies, and companies can pull together different combinations of capabilities and assets to succeed. In polyethylene, for example, ExxonMobil pursues a low-cost advantage by building large plants, while Chevron Phillips Chemical keeps costs low through aggressive process improvement. Each approach requires a different focus, yet both have low unit operating costs. What's more, any of these strategies can work in any market, as long as there are customers who value the proposition.
Companies that consistently outperform others set strategy through a series of steps to evaluate their capabilities, customers and the market.
- Objectively assess your capabilities. Too many executives believe they have differentiated their company without demonstrating their relative strength objectively. An honest assessment takes a cold-eyed view of a company's capabilities compared with competitors. For a low-cost provider, this means having relevant benchmarks for cost by spending category to ensure you stay ahead of the pack. Companies hoping to win through differentiation might rely more on data about revenue from new products. In either case, there are metrics available to prove out the source of leadership.
- Map your strategy to customer needs. Leaders identify the customers that value their proposition, then set strategy to meet those customers' needs, while deprioritizing customers who fall outside the mark. For example, strategies based on exceptional service work best with customers that have a profit profile or level of need that makes them willing to pay more for great technical service or a more reliable supply because it's a key ingredient to the customers' success.
- Align your investments and resources to support strategy. Understanding what customers value allows companies to focus their investments on building up the right strengths. Leaders continually invest in their strongest capabilities to reinforce their differentiation, often pairing this effort with secondary capabilities to make it harder for competitors to replicate. For example, chemical companies relying on R&D and product development may also increase marketing and sales capability investments to get full value out of their product innovation.
Finally, executives need to strike a balance between allowing their strategies to play out as planned, while also responding to market shifts to remain on course—not unlike the way a sailor will adjust sails for small changes in the wind to keep a steady tack. Such an approach is the best way for chemical companies to achieve their strategic goals and meet shareholder expectations, while shying away from opportunities too far from familiar competencies to apply their formula for success.
Jason McLinn is a partner in Bain & Company's Chicago office and David Schottland is a principal in New York. They work with Bain's Global Chemicals practice, which Jason leads in the Americas.