Commoditization

Hence, value chain management and specifically global value chain planning of commodities plays an important role for chemical companies due to the direct relation to globalization, consolidation as well as commoditization. Specifics of chemical commodities are presented in the following. 

Commodity as a term is derived from the French term commodite meaning convenience in terms of quality and service based on the former Latin word commoditas meaning the appropriate measure of something (N.N. 2006j). 

Commoditized specialty chemicals contain commodities as active ingredients and are interchangeable. Thus, ethylene glycol 99% is a commodity. If it is diluted with water, enhanced with a colorant, and sold as superantifreeze in a retail shop, it becomes a commoditized specialty. 

Most of the food and feed additives are commoditized. This is also the case for the artificial sweeteners. The main products are Saccharin (550), Aspartame (Canderel, 200), Acesulfam K (Sunnett, 200), and Cyclamate (35). The figures in brackets are the sweetness intensity, whereby sucrose = 1. Sucra-lose, discovered in the 1980s by Tate Lyle, now taken over by Johnson Johnson s formidable marketing machine, is enjoying a revival as Spenda. 

Vannuccini, S. (2004). Overview of fish production, utilization, consumption and trade. FAO fishery information, data and statistic unit report, ftp //ftp.fao.org/fi/stat/overview/ 2001 / commodit/2001fisheryoverview.pdf. 

Chemical products can be roughly segmented into basic chemicals, polymers, specialty and performance products, industrial gases, and agrochemicals. However, for practical purposes they are usually classified as commodities and specialties , the latter having higher value added and distinctive key success factors that allow for some additional differentiation between competing products. Albeit this distinction is commonplace in the industry, it should be kept in mind that chemical commodities are not nearly as commoditized as true commodities such... 

In the late 1990s, when investors noticed the combination of declining growth and declining capital productivity, many lost faith in the segment. While fears of repercussions from the Asian crisis proved unfounded, other structural factors such as Asian competition and the commoditization of many former specialty products took effect in their stead. 

Currently, specialty chemical players too are benefiting from better industry conditions, significant cost improvement efforts by many players, and a very cautious stance on investments and acquisitions over the last few years. However, we predict that the pre-1997 glory days will never return. Rapid commoditization of parts of the portfolio and relentless price pressure will continue to endanger business models. For some players, a rigorous focus on cost will be the path to success, others - and these businesses will still earn a substantial premium on industry average profitability - will develop true customer solutions. 

The specialty chemicals business needs to face facts the drop in profitability that characterized the 1990s has not abated in the new millennium. Competition has intensified, capital productivity has fallen, and the specialties niches are shrinking with ongoing commoditization. This does not have to be the end of the road, but specialty companies have to take a long hard look at themselves and decide whether they are prepared to fight back, and how they can best equip themselves to do so. 

Then, however, the market started to change. With the arrival of the new millennium, the specialty chemical business did not look so special anymore. Volume growth in many segments slowed as markets matured. Prices and margins came under more pressure due to increased commoditization and lower innovation rates. While prices declined, costs went up (Fig. 8.3). In Germany, for example, factor costs for chemical production increased by 2.9 percent p.a. over the last 15 years, while at the same time product prices declined by 0.4percent p.a. Though these numbers include commodities, the trend holds true for specialty products as well. 

Innovation is needed to steer the market back into specialty territory customers will only grant a company specialty margins if they perceive differentiation. Innovation is also the best strategy to raise the barrier against low-cost market entrants. Or, as one CEO put it bluntly Commoditization only happens when you let if . 

They need to refocus innovation to fight commoditization and low-cost market entrants. 

They can opt for commoditization and further develop or adopt the generic model by reducing investment in R D and marketing. 

In this new era, three basic strategies can be pursued the introduction of new and more efficient products, innovation in crop seeds with new biotech traits, or commoditization. Only the leading companies will be able to pursue more than one option. Whichever strategic model they adopt, successful agribusiness players will continue to deploy their strengths to increase plant yield through plant protection applications, improved seed quality, and approaches to targeting consumer value. 

Removing this complexity and buying IT infrastructure on demand is the next big promise of the IT outsourcing industry, but a lot of companies are not yet ready to buy these commoditized - and often only partially implemented - services because of the very complexity outlined above. Five strategic elements of infrastructure management need to be in place to simplify the overall infrastructure landscape and to establish clear accountability for infrastructure cost on the IT customer side. 

After recent consolidation and globalization efforts, many chemical companies are now geared towards creating better value for customers. The main way of achieving this is to offer customer-specific products and services. Bundling commoditized products with customer-specific value-added services allows customers to outsource manufacturing tasks and services. 

Finally, interest in biotech has increased recently thanks to its role in product innovation. At a time of increasing competition from Asia in established products and the subsequent commoditization and strong price decline, chemical companies are once again looking to innovation as a key source of differentiation. At the... 

Other trends have remained unchanged, such as the eternal pressure to increase productivity to compensate for the price-cost squeeze, or to compensate for the ongoing commoditization of many of the industry s products and services by introducing innovations. In addition, we can see a continuing high level of... 

Cohen, E. (1988) Authenticity and commoditization. Annals of Tourism Research 15 (3), 371-386. 

Commoditization The process whereby a good or service is deemed essentially the same by consumers, leading to price being almost the exclusive competitive factor. 

First, the process of building new activities along the value chain will bring the chemical industry even further toward the end customer as companies reach out to new groups of customers further downstream. At the same time, we will see an even further increase in the commoditization of specialties because customers will grow more sophisticated, and producers will not be bringing anything new to the table. 

The Commoditization of Specialty Chemicals - What Happens Next. ... 

Effident management of plant operations has been a key task since the earhest days of the chemical industry. However, the commoditization of an increasing number of the industry s products in the past decades and the resulting relentless price/cost pressure has made it a matter of urgency for firms to accelerate the process of improving their production and maintenance operations. 

Superior cost management has been a key success factor in the more commoditized chemical segments such as polyolefines and basic chemicals (e.g., methanol) for some time now, and this shows through in strong productivity improvements. 

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