The chemical industry directly or indirectly touches over 95 percent of all manufactured products. It has also delivered several modern innovations, from lightweight energy-saving composites for automobiles and airplanes to nanomaterials with groundbreaking applications in the technology, healthcare and energy industries, to name a few.

As a key enabler of innovation across sectors, the chemical industry will have a pivotal role to play in the smart cities initiatives that are currently unfolding across the globe. Chemical industry products and services have critical applications across several foundational components of any successful smart cities program – infrastructure development, transportation, energy efficiency, water management, waste management, resource usage optimization, and long-term sustainability.

It is this potential scope, scale, and significance of the industry’s contribution that brings the Indian chemical industry into focus against the backdrop of the country’s inarguably ambitious smart city mission. The government’s flagship mission of creating 100 smart cities by 2022 represents a huge potential for the country’s chemical industry, the third-largest producer in Asia and sixth in the world.

But the industry’s play in specialty chemicals, the R&D and innovation-driven segment with the most potential applications in smart cities initiatives, is still quite limited. The domestic industry currently accounts for around 3 percent of the global specialty market, though that share is expected to double by 2023. More significantly, the country has one of the lowest per capita consumption rates for specialty chemicals in comparison to other emerging markets.

The sector’s ability, both in India and globally, to participate in the smart cities opportunity will be determined by its capacity to innovate next-generation materials and solutions. But after a succession of new material innovations in the mid 20th century, the sector has focused primarily on cost management and capacity expansion to drive revenue and growth. To borrow an analyst’s words, to sum up, the state of the sector: “After 1980, though, the pipeline of new products largely dried up” as companies “discovered that the returns on investment in emerging markets were higher than the returns on R&D spending.

In an increasingly commoditized and price-sensitive chemicals market, progressive companies will have to focus on an enterprise-centric innovation strategy that not only transforms new product innovation but the entire supply and value chain. This strategy will help companies shift focus from selling commodities to providing solutions, from delivering products to enabling desired outcomes, from price-sensitive segments to value-added premium offerings and from economies of scale to economies of scope.

Digital transformation will be a key lever for companies committed to making the transformation to innovation and outcome-led chemical solutions business. But a 2015 study found that the manufacturing industry, which includes chemicals, was at the bottom of the digital maturity pyramid. According to a more recent study, a majority of chemical enterprises still lacked a digital transformation roadmap or strategy and two-thirds of specialty chemical companies were still in the early stages of digital maturity. In a rather more India-centric study, only 27 percent of manufacturing companies rated themselves highly digitized, not far behind the global average of 33 percent.

Most importantly, a significant majority of digital initiatives are still driven by operational objectives. This will certainly build on the already robust foundations these companies have to enhance cost optimization, asset utilization, and operational efficiencies but do little to realign the core business with the demands of a modern marketplace.

Chemical companies need to develop a strategic and holistic digital transformation agenda that will transform all aspects of the business, including the business model. The shift to a ‘enable desired outcomes’ key metric of delivery will have a ripple effect across the entire business value chain.

In an outcome-based engagement model, digital technologies will empower companies to directly connect and collaborate with their customers. They can also help companies track usage and performance data to predict and address customer needs as they arise.

Business processes will have to be realigned to a demand chain management model with technology integrating all enterprise functions, suppliers and customers into one organic ecosystem.

Innovation and R&D will be driven by product usage and customer demand data. Innovation cycles will have to track and respond in near real-time to evolving customer expectations.

And finally, the entire business model will have to be outcome-oriented. Digitization will combine new methods and sources of data collection across a collaborative value chain to create a flexible and agile digital ecosystem that enables enterprise-wide innovation.

Over the last few decades, many chemical companies have been focusing on operational and financial efficiencies, often at the cost of R&D and innovation, to drive revenue growth and enhance enterprise value. This inside-out approach to value creation has worked thus far. But a confluence of trends indicates that this approach may not be adequate to combat commoditization and maximize enterprise value. One, increasing commoditization, including in specialty chemicals, and stagnant innovation are only increasing the pressure on competitive differentiation, profitability, and growth. Two, emerging opportunities in resource-efficient, renewable and sustainable solutions – smart cities are only a microcosm of this opportunity – cannot be addressed by conventional business strategies, processes or models. The industry needs to be reoriented to an innovation-driven outcome-based business model in order to capitalize on these new opportunities and to affirm its position as the enabler of innovation across other sectors.

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