Accelerating the construction of World-class enterprises: a guide to the transformation of China's chemical industry

On April 7, 2022, six ministries and commissions including the Ministry of Industry and Information Technology jointly issued the "Guiding Opinions on the 14th Five-Year Plan to Promote the High-quality Development of the Petrochemical and Chemical Industry". "Opinions" in the innovation and development, industrial structure, industrial layout, digital transformation, green safety and other five aspects, clear China's petrochemical industry in 2025 development goals. In combination with the "Guiding Opinions on Accelerating the Construction of World-class Enterprises" reviewed and adopted at the 24th meeting of the Commission for Deepening Overall Reform of the CPC Central Committee not long ago, accelerating the construction of a number of world-class chemical enterprises with excellent products, outstanding brands, leading innovation and modern governance is in line with the common needs of enterprises' own development, industry transformation and upgrading, and national economic growth.

There are not many Chinese enterprises in the world's top 500, but most of them win by scale, and there is still a gap between them and the world's first-class in innovation ability and international market competitiveness. The management ability and fine operation ability of small and medium-sized enterprises need to be enhanced, and the upgrading task is urgent. Faced with the complex and severe situation, China's large enterprises must continue to deepen reform and become stronger and better than the world-class standards. Private enterprises must unite the spirit of daring to fight, fast and efficient landing ability and the standardization of corporate governance, and move forward to the world-class "specialized and special new" direction.

Over the past few decades, Chinese companies have expanded rapidly, relying mainly on market size, demographic dividends, reform dividends, and capital dividends, ignoring due attention to value creation, growth patterns, financial conditions, and organizational health. In the face of 100-year changes, the problem that Chinese enterprises are not strong, not new, and not alive will be further highlighted and amplified, bringing deep-seated obstacles to their own long-term development.

First, "world-class enterprises" are performance-oriented enterprises that take long-term sustainable economic value creation as the core measurement standard and walk in the forefront of the world

Compared with traditional accounting profits, Economic Value Added (EVA) should be used as a more comprehensive indicator to measure the true profitability and value creation ability of enterprises. Putting the annual average of EVA created by more than 2,000 listed companies in the world in the past five years into the same chart, it can be found that the top 20% of the global enterprises with the best performance created more than 90% of the global economic profits.

Although Chinese enterprises have successfully expanded their volume, and the number of enterprises has continuously led the world's top 500, the value creation ability of enterprises is generally low. In the above EVA analysis, we find that less than 10% of China's non-financial enterprises are in the first echelon of value creation, and more than 60% of enterprises have negative EVA.

Therefore, if Chinese enterprises want to break through the dilemma and reach the world-class level in value creation, they need to be clearly performance-oriented and build a series of capabilities on this basis to achieve a qualitative leap in value creation.

Second, "world-class enterprises" need to have a series of global leading capabilities as support

World-class value creation is the result of a set of globally leading capabilities. Chinese enterprises have a lot of room for improvement in capacity building. Looking back on the development path of the past 40 years, the Chinese market demand has maintained high-speed growth for a long time, and enterprises do not worry about sales and profits as long as they can make products. The vast majority of Chinese enterprises therefore focus on the "big dry fast" introduction of production line, or "small run fast" rapid iteration and expansion of production capacity. While improving decision-making efficiency and landing speed, systematic management system construction is often ignored, delaying the lean management and continuous improvement of production and operation, not to mention the research and development innovation that requires a lot of investment and long-term persistence.

The market structure in the new era has undergone fundamental changes: a large number of commodities are in a state of oversupply, once medium and high-end products continue to bulk with the development of technology and market, and the market demand for new products changes very fast, which puts forward higher requirements for the management ability and innovation ability of enterprises. The "path dependence" of extensive management can no longer meet the development needs of enterprises in the new era. Therefore, while moving towards the world class, Chinese enterprises should focus on building a set of global leading management capabilities.

1. Demand-guided innovative research and development capability

World-class value creation is inseparable from R&D innovation. Building a demand-led innovation and research and development capability is not only the need for the development of Chinese enterprises, but also the requirement of macroeconomic structural changes.

Historically, the research and development of Chinese chemical enterprises has mostly focused on the two aspects of "reverse development" (overcoming the production process route) and "technology catch-up" (improving the production process). These two types of research and development in the future can capture the value of the space is very limited. The special materials and specialty chemicals driven by the downstream high-end demand, because of their differentiated application performance, customized production process, service-oriented sales process and other characteristics, while having a higher value, they can pass the cost to the consumer side more smoothly, so as to have the advantage of obtaining higher and more stable profits.

With the continuous progress and upgrading of China's manufacturing industry, the demand for materials and chemicals in downstream industries has shown an increasingly high-end and customized trend, providing sufficient soil and space for Chinese enterprises to establish demand-guided innovation capabilities

At present, the construction of the innovation system of Chinese enterprises is rapidly increasing in terms of R&D input and output (such as the number of patents, etc.), and more and more Chinese enterprises have changed from "reverse development" to "cooperative development" and "independent innovation". However, many Chinese chemical enterprises still face the following pain points in the process of innovation and research and development:

(1) What to do: unclear innovation goals and strategies, and lack of correlation with business strategies; R&d project portfolio decision is not scientific enough, lack of clear decision basis; There is a lack of linkage between the planning and development of advanced technologies, products, applications and processes.

(2) How to do: many enterprises have landed the gating process, but only the brought process as the "standard answer", the lack of customization and tailoring according to business characteristics and innovation scenarios, resulting in heavy process, rigid application, affecting the speed and quality of research and development.

(3) Who should do it: lack of cross-departmental collaboration, emphasis on functions and light projects in organization and assessment, and regard R & D and innovation as only the matter of technical departments, can not form effective cooperation; The lack of team building planning, the lack of corresponding mechanism for the "selection, breeding and retention" of R & D talents, and insufficient blood supply; Lack of digital application planning in the field of innovative research and development, and insufficient digital leverage.

In response to the above pain points, enterprises can take three measures to gradually build a strong innovation research and development engine, and make it become a new driving force leading the high-quality development of enterprises:

(1) Establish strategic objectives for innovation

According to their own business development needs and industry characteristics, clearly define the value opportunity points of innovation for the enterprise, so as to formulate the innovation strategy of the enterprise, and strictly follow the strategic plan to ensure the smooth landing of research and development projects.

(2) Clarify the organizational structure of R&D

Guided by the business scenario and operation mode, we design the organizational structure of innovative research and development, and establish a smooth interaction mechanism with other business departments. The organizational structure of the R&D department can be an integrated industry team, market-oriented, focusing on the integration of production and research, and working together with other departments to quickly respond to market demand; It can also be a "small front-end" type subsidiary, introducing a leading core team in the industry in the form of joint venture incubation, independent of the parent company, flexible decision-making, rapid iteration of R & D innovation.

(3) Building an innovation capability system

Benefit-oriented, project-focused management systems such as R&D gate control are established to analyze and control risks from customers and markets, technologies and processes at different stages. In addition to building internal research and development capabilities, it is also necessary to cultivate mature merger and acquisition capabilities, pay attention to technical targets with appropriate external valuations at any time, and quickly achieve innovation extension or breakthrough through mergers and acquisitions.

2. End-to-end digital operation capability

Digital transformation is a globally recognized development hotspot. McKinsey's deep experience in the global oil and chemical industry shows that comprehensive digital transformation can bring 8% to 13% EBIT improvement, of which about 60% comes from the efficiency improvement brought by big data advanced analytics driven optimization.

Building world-class digital capabilities requires a comprehensive and sustainable digital transformation. The development of digital use cases based on business needs can bring real business benefits to enterprises. The business, organization and technology operation system established through digital transformation can help the sustainable development of the enterprise, and the transformation of the three aspects are coordinated with each other, and supplemented by change management, can ensure the practical landing of the all-round digital transformation.

To help set the benchmark for world-class digital manufacturing, McKinsey and the World Economic Forum have worked together to develop the evaluation criteria for digital lighthouse factories. By April 2022, through the evaluation and screening of nearly 2,000 factories around the world, the total number of lighthouse factory members has reached 103, of which 37 are located in China, accounting for more than 1/3 of the total number of lighthouse factories in the world.

It can be seen that the proportion of local enterprises is relatively low, and Chinese enterprises still have a large room for improvement in the construction of world-class digital and intelligent factories.

For chemical enterprises, digitalization is a transformation. Like the previous three technological revolutions (industrial revolution, electrical revolution, computer revolution), digitization also empowers the management and production of existing enterprises. Digital transformation will not succeed if it is separated from existing production operations and is not efficiency-oriented; it will only become a cosmetic "cosmetic project." Business leaders must clearly understand that digitization itself is not a panacea for overtaking on corners, and they need to continuously polish the management system and consolidate the management foundation in order to lay a solid foundation and achieve the success of digital construction.