A long-term analysis of the chemical industry has revealed that many factors that are thought to increase value actually do not, and delivered interesting insights into the true drivers of value creation. The study shows that the primary driver of value creation in chemical companies is in actual fact the composition of their product portfolios. Strategies to improve return on invested capital (ROIC) as the primary value driver in each of the product segments should focus on capital efficiency as well as margins and take a cautious stance on trying to outgrow performance problems. On a corporate level, a rigorous approach to portfolio management can be a significant factor in value creation, if centered around improving long-term ROIC rather than on size and growth targets, and if it ensures that the different parts of the portfolio are managed in accordance with the type of business.
Introduction to the StudyWith more than 70,000 product lines and dozens of geographic markets, the chemical industry of today is deeply complex. So many strategies -or combinations of strategies -have been developed over the years for so many markets that industry analysts and executives struggle to understand what really creates shareholder value.While previous performance is of course no guarantee of future returns, we felt for several reasons that an examination of the historical patterns of value creation might deliver insights to support forward-looking strategy formulation. The industry reached maturity about 20 years ago, the evolution of supply and demand has become, on average, more or less predictable. Moreover, unlike pharmaceuticals or telecommunications, the industry is not likely to be transformed by technologies or regulations in the near future. Hence, historical trends are fairly likely to reflect the future development of the industry as well. In order to establish a sound basis, we compiled more than 40 years of financial and stock market data on 130 publicly traded chemical companies in Europe and the United
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