Joseph L. Coote, an analyst with the management consulting firm Charles River Associates, sees ample room for improvement in an area where the sector has not been particularly aggressive. "We often see product prices at a steep discount to their value," he says, adding that a lot of companies do not fully understand the value of all the products in "tremendously complex" portfolios.

In a recent report, Coote broke down the portfolio of a client that he says typifies the specialty chemical sector. The company, according to Coote, could claim it differentiates itself from its competitors with 30% of the products it sells. Another 40% of its products offer no differentiation in the market. The remaining 30% are in between--but at risk of sliding toward commodity status.

As a bulwark against commoditization, Coote says, specialty chemical producers need to segment customers and assess the "cost to serve" for all products that customers buy. Product and service innovation efforts can then be focused on customers willing to pay. The recent run-up in raw material pricing, Coote says, has prompted many specialty chemical companies to move in this direction.

"Margin restoration has been our mantra these past two years," says Phillip H. Cook senior vice president for performance chemicals and thermosets at Dow Chemical. Even in Dow's specialty businesses--where pricing is based more on value added by functionality than on supply and demand or feedstock costs--improving margins is an important focus, he says.

Segmentation evaluations are a key, Cook says. "Just 20% of Dow's customers contribute 95% of our margins," Cook says. "While some of this effect is due to scale, much is due to the product mix and value. We are focusing more on these so-called winning customers."

	Gulyas
	DUPONT PHOTO

Like Dow, DuPont is working to get a better understanding of the value of products to customers. It has had some success in increasing prices--though Gulyas acknowledges that raising prices is difficult to do without some associated technical or service enhancement.

Cook says Dow is gaining some traction on prices. "Customers are starting to understand that if they want us to keep investing in R&D as well as new capacity to meet their growth needs, we need to improve our margins," he says.