In emerging markets, producers with cost-advantaged operating models are targeting these newly commoditized segments in order to capture the spread between the semi-specialty price and their low operation costs. In the last year or so, companies such as Dow Chemical Company’s Rohm and Haas and BASF’s Ciba have attempted to respond to this encroachment by doubling down on specialties in search of better margins and stable, high-quality earnings typical of this sector.
Some emerging acquisition trends further point to power shifts unfolding in the global chemicals industry. For example, having already taken over Nova Chemicals, the Abu Dhabi state-run company IPIC is in talks with Bayer MaterialScience. Likewise, India-based Reliance Industries is reported to be performing its due diligence on the bankrupt assets of LyondellBasell Industries AF.
Now more than ever, leading firms must aggressively take action to enhance those parts of their companies that are capable of generating superior returns, and sell off or close down those that never will.
For the foreseeable future, retail banks will face a weakening of consumer demand. Personal savings rates will remain higher, banks’ balance sheets will shrink, commercial real estate will falter, and tighter regulations of products such as credit cards and overdraft protection will restrict profits. With all this, retail banks can anticipate a lower return on equity than in years past.
In this environment, the focus of banks will shift from acquiring new customers to building deeper relationships with existing ones. Banks must carefully identify and capture growth opportunities within their customer base by understanding demographic shifts and focusing on attractive segments for growth. These include:
- Affluent and retired consumers: The affluent may have fewer assets than they did three years ago, but they still have more than most people and they remain a profitable segment. Meanwhile, retirees and retiring baby boomers need to save diligently and invest intelligently. Banks can build trust and market share among these consumers with holistic offerings of products and services, as long as their offerings are transparent and low cost.
- Generation Y: By 2014, Gen Y will make up the largest segment of the U.S. workforce, and by 2025 it will account for 60 to 70 percent of the employed population. Given the size of this segment, connecting with Gen Y is a must for banks. To do so, they will need to better integrate their channels and interact with customers through each customer’s channel of choice. More than any previous generation, this one is shaped by the Internet and ubiquitous connectivity.
- Small businesses: Small businesses were hit hard by the crisis when banks froze lending. By jumping in and grabbing market share now, banks could increase their lending and capture business owners’ personal accounts.
Additionally, to succeed over the long term, banks must bring down operational costs — not just by capturing traditional back-office savings but also by taking a hard look at distribution costs. Booz & Company research shows that mass-market customers prefer to conduct their banking at branches, which account for 70 percent of traffic and resource consumption. Yet mass-market customers are only half as profitable as mass-affluent customers. The rise of Gen Y will put further pressure on the traditional bank branch network, which banks may soon be unable to afford. Indeed, we expect that a major rationalization of branch networks will emphasize electronic channels and alternative formats. In the future, for example, branches may cater to specific customer segments, becoming “wealth” branches or “small business” branches, with fewer expensive, resource-hogging generic branches open to all.