The pace of change in the chemicals industry is slow. Despite a wave of mergers and acquisitions between the likes of Degussa and Hüls, and Dow Chemical and Union Carbide, the same companies have held the top ranks for well over a decade.

What is wrong with that? Nothing—if the companies earn adequate returns for their shareholders. But in reality, though the chemicals industry has performed quite well in comparison with other process industries, its relative stock market performance overall has been no better than average. And looking ahead, the traditional growth strategies of chemicals companies are running out of steam. Unless they find a new direction, they will preside over ever-diminishing growth prospects that will prompt shareholders to abandon the sector.

Over the next decade, traditional asset-based strategies will still be an important source of profit, but chemicals companies will also need to create other such sources to satisfy their shareholders’ longer-term growth expectations. Knowledge-based strategies will provide that new growth.

Chemicals now

The industry today includes three main kinds of companies. Commodity players, such as Shell Chemical and Union Carbide, produce basic chemicals and plastics. They account for a little over a third of total sales. Specialty...