Today’s chemical downturn requires honest reassessment. Affordability constraints matter, and the objective should be to stay in the game.
(apology to my readers, I forgot to schedule this email last week. The good news is you get two this week! - next one Friday)
Last week, I offered a deeper dive into 2 points of our 4-point framework for reassessment of investments that’s required in today’s climate. Every investment, including costs that are "renewed every year” needs to be assessed. It may be tempting to "stay the course," on some investments, and I can see the emotion behind that, but every investment should be scrutinized. Be willing to stop anything that doesn’t make sense. Save your conviction for what's left over - you're going to need it.
Last week we talked about paying attention to new cost constraints. However, an often overlooked factor is the capital intensity of a new initiative. Why is this overlooked? If we confine our analysis to cost, the capital component of cost is usually amortized. But the cash impact of a capital investment happens up front, and is often significant. This leaves the risk of the return to accrue after the investment, sometimes long after and with high risk. So capital brings a different risk view into focus.
This is true both of our own investments, but more importantly, of customer investments. In times of economic uncertainty and downturn, options that require investment are often deferred due to affordability and risk. We often see that even if the long term cost picture stands to improve that customers will favor options that don’t require them to front new investment. Here’s the criteria you should use.
That’s the bar. One layer of the value chain which requires an investment can shelve the whole initiative, if they can’t obtain financing.
Many times, and especially with many of today’s “sustainability” initiatives, customers are looking for new options because of some regulatory pressure looming on the horizon. Maybe a certain material will get banned in an application, or new regulatory costs will be added to current solutions. In tough times, regulatory pressure often ease, and that is true in today’s climate.
It is risky to believe that initiatives will continue when regulatory pressures ease. It’s possible, but it pays to examine what the new conditions are and ask if and why customers would continue.
These analyses are often easy, and the key to actioning them remains courage. The courage to face the realities.
There are two key mindset shifts that we have found helpful in countering our cognitive bias when these sorts of behaviors come up.
First, no matter how it might feel like it, nothing is permanent. The goal here is to survive the downturn to play another day. Initiatives can be revived. Capabilities can be rebuilt. In fact, the first to prune, stands the best chance of weathering the storm, and is likely the first to emerge. More importantly though....
Second, pruning breeds innovation. When you close options that are not viable, it opens up the question “What can we do to innovate our way into viability?” Your organization will start thinking about that and you’ll be surprised by what they come up with. But they often won’t do that if you keep unviable initiatives alive.
So have the courage to say no. Survive to thrive another day.
Until next week,
Kendall -
Find me on LinkedIn or Book a 1:1 call
Not a subscriber yet? Subscribe here