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by the Booz & Company industry teams; introduced and edited by Karen Henrie

Each year Booz & Company͛s industry teams write perspectives for their clients, reflecting on the
previous year and considering what may come in the year ahead Ͷ and how to respond to it. Not
surprisingly, the perspectives for 2010 (12 in all) were dominated by gloomy pronouncements of the
damage left by the global recession: The US$2 trillion chemicals industry is attempting to ͞rebound from
its worst year ever͟; in financial services, more than 120 banks failed and a ͞doomsday scenario was
[narrowly] averted͟; in technology, Microsoft suffered its first revenue decline ever in 2009, while
semiconductor sales fell 11 percent; the engineered products and services (EPS) team wrote that ͞Wall
Street cast doubt on the future of many U.S. companies as their valuations plummeted.͟ (Only six of the
30 companies that make up the Dow Jones Industrial Average still come from the EPS sector.)

But in addition to the long shadow cast by the economic crisis, this year͛s industry outlooks also contain
a collective note of warning that deserves even more attention: A handful of underlying structural
changes Ͷ in demographics and consumer economics, globalization, and sustainability Ͷ are having a
more irrevocable, dislocating effect on virtually every industry than the financial meltdown ever could.
Worse yet, although most companies recognize that they must transform to survive and succeed in the
future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly
structured to respond to these changes as they unfold.

The impact of these trends varies by industry. Oil and gas is more affected than retail banking by
sustainability; globalization is reshaping chemicals more than, say, utilities. Yet no company will fully
escape the reach of these trends. A quick glance at six industries Ͷ chemicals, retail banking, consumer
packaged goods, engineered products and services, oil and gas, and technology Ͷ illuminates their
overlapping challenges and the range of strategic responses that are taking shape.

Ͷ Karen Henrie, Senior Editor

þ
    

Commoditization and other effects of globalization will characterize the chemicals industry for years to
come. But the chemicals industry is experiencing a mix of denial and excess optimism that has led to
paralysis. As a result, strategies and operating models have been slow to evolve.

The drop-off in demand for chemicals appears to have bottomed out, but the harm has been done.
Demand is now rising on average, but only from severely depressed levels Ͷ in some cases, demand had
declined by 40 percent. Most new growth is in Asia; Middle East producers continue to enjoy
competitive advantages, and many assets in North America and Europe are severely impaired.
Simply put, there is far too much capacity in chemicals to support viable margins, and new supply from
cost-advantaged companies around the world continues to come on line. The obvious response would
be to initiate consolidation and dramatic cuts in capacity. But although North American and European
chemicals producers have made modest attempts to whittle back output, given the enormous gap
between supply and demand, these efforts fall far short of what is necessary to restore the industry to
economic health. Among other misperceptions, incumbent producers have a false hope that the rising
costs of labor and other inputs will erode the pricing power of producers in the Middle East and Asia.

Makers of specialty chemicals continue to provide elegant, high-value solutions to a number of niche
segments, but no single specialty market exists on a mass manufacturing scale. And there is a pervasive
trend toward the commoditization of products that were once specialties. Furthermore, specialty niches
are becoming increasingly scarce as more competitors chase a smaller market.

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 Company͛s Rohm and Haas and
BASF͛s 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.

Ͷ Joachim Rotering, Richard Verity, and Dennis Cassidy

Click here for the full 2010 Chemicals Industry Perspective (PDF)

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For the foreseeable future, retail banks will face a weakening of consumer demand. Personal savings
rates will remain higher, banks͛ 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:
 áÊ ‰



 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.

áÊ 

  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 customer͛s channel of choice. More
than any previous generation, this one is shaped by the Internet and ubiquitous connectivity.

áÊ c 

 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 owners͛ personal accounts.

Additionally, to succeed over the long term, banks must bring down operational costs Ͷ 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 ͞wealth͟
branches or ͞small business͟ branches, with fewer expensive, resource-hogging generic branches open
to all.

Ͷ Paul Hyde, Amit Gupta, and Ashish Jain

Click here for the full 2010 Financial ServicesʹRetail Banking Industry Perspective (PDF)


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Over the past few decades, consumer packaged goods (CPG) companies have built longer and more
unwieldy global supply chains without seriously considering the ever-increasing costs of managing them
and the likelihood that their sheer length would make them less able to meet the needs of local
consumers. Moreover, the possibility that these complex supply chains might create unmanageable risks
to product inventory, quality, and safety was given short shrift. Simply put, today͛s supply chains were
built on yesterday͛s blueprints, in a world where low energy and transportation costs, cheap labor,
relatively inexpensive raw materials, and scarce environmental regulations were fixed assumptions. The
supply chain of the future, by contrast, will require capabilities to make it leaner, greener, and more
tailored to manage increasing fragmentation and complexity.
Global supply chains are already under increased pressure to deliver lower costs, in part to help offset
generally rising costs for raw materials and energy. That pressure may be dialed up even further as
governments around the world put a price on carbon emissions and establish new regulations on waste
by-products. Large swings in exchange rates are also contributing to supply chain woes by driving shifts
in demand and changing the economics of production. At the same time, as CPG companies emerge
from the recession, they need to stay ahead of the curve on longer-term changes in demographics.
Shifts in consumer behavior taking place across markets are making it harder to satisfy an increasingly
fragmented customer base without reengineering the supply chain.

Because of public demands for environmentally sustainable business practices, companies will also need
to rethink their choices in product design and process technology. This is particularly true in the case of
the ingredients they use, the packaging that is required, and the quantity of materials and energy
consumed by manufacturing processes. They will also need to realign their supply networks to build
more flexibility and adaptability into their processes while reducing their carbon footprint.

Finally, CPG leaders will need to engage in larger collaborative networks to better understand sourcing
decisions and share information on new production processes and technologies. As Anheuser-Busch
Companies can attest, even small changes can have a meaningful impact on the bottom line: The
company worked with key suppliers to help it reduce the lid diameter for four types of cans, saving 17.5
million pounds of aluminum in one year alone.

Ͷ Edward Landry, Luis Quintiliano, and Kolinjuwa Shriram

Click here for the full 2010 Consumer Packaged Goods Industry Perspective (PDF)

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During the worst of the downturn, the mandate from investors to executive teams and boards at
engineered products and services companies Ͷ including those in aerospace and defense, industrials,
the automotive sector, and transportation Ͷ was unequivocal: Improve liquidity and cash flow.
Management turned its attention back to basics with a focus on cost reduction and capital restructuring,
and developed a heightened sense of priorities. On second look, though, these crisis-driven short-term
remedies may have only exacerbated U.S. industrial troubles in a globalized economic environment.
Competitors in emerging countries were not immune to the recession, but they were still operating in a
growth environment. They were able to continue building on their strengths in engineering, product
development, critical skills, and low-cost supply chains even as they endured their own economic woes.

The shifts in global output are striking. The International Monetary Fund projects the world economy
will have shrunk by 1.1 percent in 2009, with mature economies, including the United States, Germany,
and Japan, contracting by 3.4 percent and emerging economies growing by 1.7 percent. In 2010, overall
global growth is expected to hit 3.1 percent, but China is forecast to grow by 9 percent and India by 6.4
percent. Meanwhile, growth in the United States is projected to be 1.5 percent, and in Europe, just 0.3
percent.

Until now, many domestically focused North American EPS companies have generally not had to
compete for growth around the world, but trends point to fierce new global competition. Emerging
competitors could claim a sizable share of their home markets and simultaneously make inroads into the
United States and Europe. Newly industrialized giants on the receiving end of the outsourcing trend
have been developing their engineering and services skills for years. Now they are poised to aggressively
compete with their Western counterparts. Three of the world͛s top five automobile-producing countries
are in Asia (Japan, China, and South Korea). The Commercial Aircraft Corporation of China is developing
an airliner to rival planes from Boeing and Airbus. A Chinese company, Zhejiang Geely, is likely to acquire
the Volvo brand this year; meanwhile, Tata Motors of India has purchased Jaguar and plans to export
the low-cost Nano to the United States within a few years.

Globalization can be seen as a continuum along which some EPS sectors have evolved more than others.
At one extreme are companies that are limited by government constraints such as tariffs or export
control. At the other extreme are companies operating in fully open, free market environments.
Companies that are inherently restricted to domestic markets, such as rail transport or freight
operators, are typically the most limited participants in globalization. Next are companies that export
products and services to reach international customers, but keep product development and
manufacturing at home. These are followed by companies that gain access to international markets
through partnerships or joint ventures, such as British Airways and Lockheed Martin. Finally, truly global
companies have an in-country industrial presence, are executing domestic strategies in multiple
countries, and develop customized products for each of their strategic markets. Companies at this level,
such as Caterpillar, FedEx, Toyota, and BAE Systems, build a sustained presence through local
acquisitions and sourcing.

Superior capacity management or engineering skills are no longer enough to differentiate companies in
today͛s competitive environment. Global growth demands strategic approaches and operating models
tailored to the dynamics and needs of individual markets. What is certain is that global growth will
require lower-cost business models and capabilities for the future. As the global economy emerges from
the shock of the past year, business leaders must recognize the potential of foreign markets,
acknowledging that the United States is no longer a high-growth economy. They must understand the
implications of a changing competitive landscape, and embrace the global economy as an opportunity
rather than a risk. Companies that build defensible capabilities, continue to innovate, and maintain cost
competitiveness will be the ones that not only withstand future crises, but prosper.

Ͷ Matt Ericksen, Robert Reppa, and Randy Starr

Click here for the full 2010 Engineered Products and Services Industry Perspective (PDF)

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Top-down regulatory and legislative actions aimed at curbing carbon emissions, coupled with bottom-up
changes in consumer behavior toward frugality and sustainability, are among the dynamics creating
substantial uncertainty in the energy sector. In response, all players will need to scrutinize the mix,
quality, and performance of the assets in their portfolios.

Oil producers weathered the recent meltdown well as the OPEC oligopoly ratcheted supply downward in
line with shrinking demand. Downstream, the news wasn͛t as good. Refiners were particularly hard hit
because overcapacity, partially built up in response to the prior demand surge, had already deeply cut
margins; refining margins will likely continue to be depressed, at least in the short term. Meanwhile,
refining costs are expected to increase with the passage of some form of carbon legislation. Such
legislation is likely to require refineries to purchase pollution permits, to invest additional capital in
pollution mitigation measures, or both. The problem of oversupply is exacerbated by the challenges in
eliminating capacity: Refineries are difficult to shutter, and refining is a fragmented industry sector.

Furthermore, demand for gasoline will also remain under pressure in the coming years as mandates for
biofuels, the popularity of hybrid and diesel vehicles, and perhaps the use of natural gas in fleets and
elsewhere exacerbate supply pressures.

Natural gas producers also have little to cheer about. U.S. natural gas inventories remain high at
approximately 3,800 billion cubic feet (bcf), almost 500 bcf above the five-year average from 2004ʹ08.
Moreover, many unconventional fields are continuing to produce at higher-than-expected levels,
despite significant declines in drilling activity. And marginal liquefied natural gas (LNG) cargoes, although
down more than 15 percent from two years ago, continue to add to the oversupply. Consequently,
despite a slight recent run-up, natural gas prices are still languishing at less than half of their July 2008
level. One positive, though still far from certain, possibility for natural gas producers: Carbon legislation
pending in Congress could greatly expand natural gas usage in power generation as well as in
transportation.

In our view, the key element of any viable future strategy for refiners and natural gas producers is
͞shifting to the left͟ on the supply curve. Although some incumbent positions will be difficult to
overtake (for example, mega-scale refineries integrated with petrochemical operations), we foresee
shifts that integrate and consolidate existing assets into stronger, more resilient positions. Equally
important, in light of industry maturation and continuing segmentation in asset types and markets,
companies should push harder to identify and capture advantages in execution. Both in oil and in gas,
emerging asset classes including deep water, extra-heavy oil, unconventional gas, and LNG create
opportunities for skill advantages.

Shifting left is not an easy assignment for many companies because they tend to form attachments to
hard assets and find it difficult to make investment and divestment decisions based on forecasts. There
is always the possibility that the predictions may be wrong and the race to the left may be foolhardy Ͷ
what if demand rebounds and shifts the curve to the right? But that͛s not likely. Moreover, companies
often struggle to objectively assess their existing capabilities to determine which Ͷ if any Ͷ are
differentiating, and which are needed to win in each asset class. Yet refiners and natural gas producers
stand at a critical juncture and need to carefully assess the implications of reducing capacity to bring the
overall portfolio in line with new forecasts for future demand and supply. They must also consider how
to out-execute competitors; e.g., through better operating approaches and improved use of technology.
We envision an escalating M&A and joint-venture environment as companies seek to achieve these
advantages in position and operations.

To shift to the left side of the supply curve, we recommend a combination of the following four actions:

áÊ 
 
 
 
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'  & ( For example, an emerging segment of the gas business,
unconventional gas, offers increased opportunities to create competitive advantage based on
differentiated execution skills, such as through application of lean manufacturing techniques.
Likewise, LNG offers differentiation opportunities around market and trading skills, among
others. At the same time, cut costs deeper in areas that are undifferentiated. This represents a
break from the traditional industry approach of indiscriminate, across-the-board cost cutting.

áÊ # 
 



 

    

 

  


 
 Holly͛s integration of Group III
refining assets and Devon Energy͛s decision to shed international and Gulf of Mexico assets to
focus on its unconventional gas and other positions in North America are recent examples of
this strategy in action.

áÊ  
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   Sunoco and Valero have
already employed this tactic on the refinery side. Suncor Petro-Canada and others are moving in
this direction upstream.

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  For example, several international oil companies (IOCs) have partnered with
unconventional gas specialists to access both their operating model skills (e.g., lean
manufacturing) and first-mover positions in prospective shale gas basins. Long-term crude oil
agreements between national oil companies (NOCs) and Gulf Coast refiners could make the
difference between creating a sustainable position under a new operating model and becoming
a marginal refinery.

Ͷ Andrew Clyde and Glenn Klimchuk

Click here for the full 2010 Oil and Gas Industry Perspective (PDF)

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The growing power of emerging markets is helping to redefine the technology sector, which includes
semiconductors, consumer electronics, software, computing, and network infrastructure. Even as tech
sector growth remains sluggish in developed markets, we expect much of the sector͛s action to move
east and south to developing markets, especially the BRIC countries (Brazil, Russia, India, and China).
Most of the future growth in the PC market will occur in these markets Ͷ indeed, in the BRIC countries
alone, the number of PC users is expected to increase more than 30 percent annually, to more than 500
million by 2012. And local vendors, which already control as much as 30 percent of these markets, will
likely take the lead, especially in ultra-low-cost PCs and netbooks. Meanwhile, more and more sourcing
activities are moving to the developing world: India and China have already captured large portions of
this activity, and other countries are beginning to catch up.

As this trend escalates, developing markets will become increasingly sophisticated. Local companies will
move up the value chain, from manufacturing to design to innovation, all at very low cost Ͷ a process
that will mean significant disruptions to traditional supply chains. Ultimately, these firms will begin to go
well beyond manufacturing goods for other companies to brand, and create their own brands at highly
competitive price points.

Indeed, some already have. The success of the Chinese shan zhai companies, which make copycat
(sometimes pirated) products, is a symptom of this trend Ͷ and an example of a rapid burst of
disruptive innovation. The best of them Ͷ including PC maker Acer, flat-panel TV manufacturer Vizio,
and Huawei, now the second-largest mobile telecom equipment maker in the world, behind Ericsson Ͷ
have succeeded in transforming the dynamics of a number of markets in China and, increasingly,
overseas. Other companies, such as Tianyu, Orange, Anycat, and Nokir Ͷ all of which make mobile
handsets Ͷ could follow the same path. It remains to be seen whether companies in the developed
world will be able to compete, given the downward pressure these new players will place on already
thin margins.

Ͷ Barry H. Jaruzelski, Gregor Harter, and Kenny Kurtzman

Click here for the full 2010 Technology Industry Perspective (PDF)

 

Virtually all companies need to aggressively formulate and execute strategic responses to the
overarching forces that are influencing their industry. The process begins with a dispassionate, focused
analysis of existing assets and capabilities, and an assessment of their ͞fit͟ in a rapidly changing global
landscape. Through that analysis, the path forward will become clear. It will mean holding and further
developing the best assets, selling off or shutting down those that will never deliver strong performance,
and inorganically filling gaps as needed. For business-to-business and business-to-consumer companies
alike, it will also mean sharpening capabilities along the value chain Ͷ from sourcing through customer
delivery and service Ͷ to identify and capture available growth opportunities while controlling costs at
every turn. Since many companies are still reeling from the recent crisis and slowly awakening to see
what tomorrow will bring, those that quickly acknowledge that they face transformational challenges
more threatening than the economic recession will have first-mover advantage. A visceral and unsettling
sense of urgency that leads to action is a healthy response.
Click here to read the full collection of Booz & Company͛s Industry Perspectives

‰  -  


áÊ 
   is a principal with Booz & Company based in Dallas. He leads the firm͛s U.S.
energy supply chain practice, working across the oil, gas, chemicals, and utilities sectors.

áÊ ‰
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is a partner with Booz & Company based in Dallas. He leads the oil and gas team
in North America.

áÊ )" 
 is a partner in Booz & Company͛s global engineered products and services team,
leading the industrial practice in North America. With 22 years of consulting experience, he has
wide experience in strategic planning, capability development, and organizational design.

áÊ ‰  is a partner in Booz & Company͛s New York office. He focuses on consumer financial
services and new technology, specializing in the card and payments industry.

áÊ 
 . 
is a partner with Booz & Company in Munich. He specializes in strategy
development, operations and performance improvement, and green initiatives for the telecom
and technology sectors.

áÊ !.
is a partner with Booz & Company based in New York. He consults with senior
executives in the U.S., Asia, and Australia on a range of strategic and organizational issues,
primarily serving the financial-services industry.

áÊ ‰  /  is a principal in Booz & Company͛s financial-services practice, based in Chicago. He

works on operating model transformation and growth strategies for retail bank and credit card
clients.

áÊ  ./ 0
 is a partner with Booz & Company in Florham Park, N.J., who leads the firm͛s
work for high-technology and industrial clients. He specializes in corporate and product strategy,
product development efficiency and effectiveness, and the transformation of core innovation
processes.

áÊ 
1   is a partner with Booz & Company based in Houston. He specializes in helping
oil and gas companies manage the convergence of people, processes, and leading-edge
technologies into new operating models and overcoming such models͛ inherent adoption
challenges.

áÊ 1
1 0 is a senior partner with Booz & Company based in Houston. He leads the firm͛s
technology and communications activity in North America and has served clients in such areas
as corporate and business unit strategy, operations, sales and marketing performance, cultural
change, leadership team effectiveness, and company turnarounds.
áÊ "& 2  is a partner at Booz & Company based in New York. He has extensive experience
in consumer products, with a concentration in strategy development and sales and marketing
effectiveness for consumer packaged goods and health-care manufacturers.

áÊ 2 3    is a principal with Booz & Company based in Dallas. He works with the firm͛s
consumer, media, and digital practice, and specializes in sales force effectiveness, trade
promotions effectiveness, and channel management for clients in the U.S. and Latin America.

áÊ 

 is a partner in Booz & Company͛s automotive, transportation, and industrials
practice, based in Chicago. He works on growth and sales and marketing effectiveness and has
served a wide range of clients in the U.S., Asia, and Europe.

áÊ / 
 is a partner with Booz & Company based in Düsseldorf. He specializes in
operations, working primarily with clients in the oil and chemical industries.

áÊ 1 +&c  is a Booz & Company principal based in Chicago.

áÊ c is a partner with Booz & Company based in Florham Park, N.J. He co-leads the firm͛s
strategy consulting work in the aerospace and defense sector, and also has extensive experience
addressing a broad range of strategic issues in the information technology and
telecommunications sectors.

áÊ    4
 is a partner in Booz & Company͛s London office and leads the European
chemicals practice.