Innovation vital to future of chemical industry: roundtable

Innovation: where next?

03 September 2007 00:00  [Source: ICB]

Innovation lies at the heart of the chemical industry, but how efficient are companies at innovating, and what are the main obstacles in the path to success? Senior industry innovation leaders met recently to discuss the issues at a high-level roundtable organized by ICIS Chemical Business and Celerant Consulting

John Baker/London

INNOVATION IS the key to sustaining profitability. In the past, entire businesses have been built on innovation, and it will continue to be the bedrock in the future.

But although innovation is an important, and, indeed, increasingly important, part of most companies' strategies, the chemical sector continues to struggle with how best to innovate and, more importantly, how to extract value from its efforts.

Even the best practitioners of the art face a number of significant issues today. Is sufficient funding available, and are there enough appropriately skilled researchers? Are the right metrics in place to monitor performance and success? Is the process of project portfolio management robust enough to see the best ideas flourish, over short-, medium- and long-term horizons?

On top of all this is the task of generating ideas, driving them through research and development (R&D), and, in the end, producing innovations that customers and, ultimately, their customers require, and will pay a premium for. The industry does not have a good track record on extracting value from its innovation effort.

These issues were discussed in depth at the recent ICIS Chemical Business/Celerant Consulting round table discussion on innovation, held in Brussels, Belgium. Nine leading innovation specialists (see box) offered their insights and solutions.

Integrate to innovate

There was a high degree of agreement on best practice and the way forward. One significant insight that emerged early on, and with strong emphasis, is the need to integrate sales and marketing with the innovation effort from the initial stages of any project.

Most ideas for innovation come from existing customers, as revealed from a recent ICIS/Celerant survey of the readers of ICIS Chemical Business (see side article). But unless customers' real needs are understood and communicated to the researchers, what emerges at the end of the process may not be what is required. If the innovation does not offer the right benefits, the customer will not pay, and the chance to create value is lost.

Gernot Klotz of Cefic says a lot "depends on understanding the value chain We need to talk with our major clients and their end customers along the chain and it is our responsibility to come up with new solutions for the customer. We need to find innovative ways to manage the approach."

Alfred Hackenberger of BASF also sees the need to understand what the customer wants as increasingly important. Innovation is "more and more market-driven people need to know what the customer wants, for example low costs, a partnership or even a larger relationship. The whole chain has to change."

Len Berlik, formerly an executive vice president at ICI but now an independent consultant, agrees that there is a problem. The chemical industry, he comments, "is weak in the customer interface. Coming up with molecules is often the easiest part of the innovation process, but frequently the customer interface does not perform satisfactorily. For customer-driven innovation we need to improve this interface."

Babette Pettersen of Dow Corning adds that creating value for the customer and the corporation is the critical target, and that understanding and/or anticipating customer needs, and effectively linking these to advantaged corporate capabilities is fundamental to mutual value creation. "In assessing how best to create value, Dow Corning considers multiple ways to innovate using the '10 ways to innovate' framework, which extends beyond product and process, to include innovation throughout the business value chain, from innovation in the channel or the brand, through to innovation in business models and customer experience."

She points to Dow Corning's launch of the world's first e-commerce site for silicone, Xiameter, as a good example of how multiple ways to innovate can be used to create value for customers and corporations. "This low-cost, web-enabled business model was created to meet the needs of value-seeking customers who wanted standard products at the lowest price, without the traditional services and innovation that were provided as part of Dow Corning's standard offerings."

Underlining the importance of integration, Hackenberger adds that "very early inclusion of sales and marketing people is important we have to have a business case before any projects start - even for longer-term projects."

Another important factor is to have a business unit ready and willing to take on the development as it emerges from the laboratory into the commercial phase.

Collaboration

For some, the use of open innovation and collaborative projects is one way forward to see that innovations meet specific customer needs. Martin Riediker of Ciba Specialty Chemicals believes consortia are a powerful way to proceed in future. "Traditionally, we had projects with a partner or customer," he explains. "Now we have consortia in specific areas - involving system integrators, material producers, and customers these are powerful and important steps to create new business."

Anssi Soila of Kemira agrees that more ideas can come from collaborations than from just the customer, and Hackenberger points to collaborations at BASF - for example with Bosch - where the two firms are developing materials for organic photovoltaics, in BASF's Joint Innovation Lab Organic Electronics.

Consortia and open collaborations are almost the raison d'etre for SusChem, the joint chemical and biotech technology platform, overseen by Klotz at Cefic. He believes projects such as the Smart Energy Home are important to drive research, which participants can then develop and bring to market.

The key point, again, is that with customers and equipment makers in the collaboration, ideas are rife, and customer requirements are firmly in the mix from the beginning. Klotz is keen to see chemical companies becoming involved at an early stage of the implementation of projects within the EU's 7th Framework Programme. He says Cefic will be issuing guidelines on participation shortly, with special focus on advice for small and medium-sized companies.

"Another critical issue," he adds, "is to have a reliable political and regulatory framework for innovation in Europe. This is a major issue when talking about public perception and acceptance of innovation and ideas of risk."

One of the key issues, says Robert Kirschbaum of DSM, is funding. He sees two types of consortia: the precompetitive type that requires external funding, from the EU and financial institutions and company-driven consortia that are internally funded. Riediker believes there are plenty of good institutions in the EU with a lot of money, as long as industry is prepared to seek it out. Pettersen, however, points out that in the EU it can take a long time to get funding and administrative resources can be an issue.

The precompetitive projects need seed money and investors so that proofs of principle can be established. But, points out Berlik, it is often difficult for companies to put in money as they have to look for short-term returns. Here, says Soila, it is important for companies to have clear corporate strategies for investment, so that the board can be persuaded to award funds when it sees a project is aligned with strategy. Pettersen agrees, adding that even for early research it is important to understand if progress and funding is aligned to strategy and whether it might make money. "You have to run the business ruler over it," she advises.

Manpower shortage

One issue the roundtable participants agreed on was the constraints posed by the shortage of suitable scientists and innovators. Dominique Montjean of Celerant Consulting feels that the EU does not have enough engineers to spend 3% of its GDP on innovation, as called for under the Lisbon Protocol - the current expenditure, he notes, is closer to 1.5%.

But, he elaborates, innovation relies on the quality of people and their way of thinking, and not only of researchers, but people in finance, legal and marketing roles. "All need to be set on innovation. But often these people tend to be risk averse - they need to accept that medium-term investments can be made on non-proven concepts."

Claus Steinborn of Solvay Pharmaceu-ticals also believes that talent is a big issue: "It's a challenge to get the right talent and skills in place." However, he adds, we should not think solely in terms of European skills -companies need to look globally into innovation. "Solvay Pharmaceuticals always takes a global approach to projects we don't care where we do the innovation, and if we would do it in China, that's fine." He sees China developing skills very quickly and believes it can soon catch up with the West.

Berlik concurs with this, saying that many companies have been looking at China and India as sources of low-cost but high-quality people, and are shifting the balance of their efforts to these countries for global projects.

One thing is sure, adds Kirschbaum: "The war is on to recruit talent."

Horizons and metrics

Another major theme that emerged around the table was the need to manage innovation in terms of the portfolio of projects and know when to proceed with, and when to stop, projects. Dow Corning and DSM both employ a three-horizon approach to innovation, encompassing short-term, medium-term and long-term projects, each with their own approaches and success criteria.

The near-term is generally customer-driven, incremental innovation on specific products and can be assessed on a return on investment metric. Longer-term innovation is on a broader basis, often around technology clusters, and is more readily assessed on a milestone basis or in terms of net present value. Another approach is to monitor how many projects pass from one stage to another in long-term innovation.

Pettersen says Dow Corning maintains a strategic focus on all three, with success in short- and medium-terms projects required to fund the longer-term research.

Kirschbaum describes the DSM three-horizon approach to innovation as consisting of projects of up to three years' ­duration, which are largely customer-driven those of three to seven years' duration, which are built around clusters of products or technologies and, for the longer term, corporate innovation, looking into megatrends in society and technology so that DSM can move into emerging business areas.

Most companies, says Montjean, have financial metrics in place, especially on shorter-term projects, but even so, return on investment is difficult to quantify.

It is generally used by top management, who are looking at short-term measurements. Companies are much less good at using operational metrics in their longer-term projects.

Berlik says that most of innovation in the industry is based on a five-year time line, while Riediker says he sees many companies shifting the emphasis on their innovation effort to renewing their product portfolio, and not so much just helping the customer through incremental growth.

But whatever the timescale, most agree that having an effective stage gate process, which is strictly adhered to, is vital to sort the wheat from the chaff. Even when companies nominally have processes in place, it is only too easy for them go astray and not follow them, even though, as Hackenberger remarks, "a crucial aspect of commercialization is return on input, and effectiveness is vital."

On the whole, the consensus is that efficiency and effectiveness of innovation has been improving, within the larger companies, at least. The key question is how to extract the most value out of innovation projects. Here, along with the reiteration that in Europe we are weak in converting knowledge into money, there were a number of suggestions.

One, says Hackenberger, is to negotiate early with the customer in any collaborative project, and agree a worthwhile model for sharing the value that results from the innovation. In many cases, although chemical producers come up with products that enable technological advances, such a flat-screen displays and printed electronics, they only get a cost-plus return on their investment, while others reap the real benefits.

One exception, says Pettersen, is the way Merck managed to extract value out of its liquid crystal technology. She sees several reasons why the chemical producers do not create more value, notably "that they don't understand the value chain, they don't really believe they can capture extra value, and they find it difficult to partner effectively along the value chain by giving something away to get more value."

Courses of action

Another approach, she adds, is to think about the breadth of applications, and think in technology platforms, rather than simply one-off developments. "Create a technology map for an area," she urges, "hundred-million-dollar businesses do not grow on their own."

Other suggestions are to adopt new models, for instance, charging for technology directly, or, alternatively, giving away the materials and taking a license fee for sales of the finished products. These, admits Berlik, have not usually worked, but are worth pursuing as a model in the future.

As Celerant's Roger van den Heuvel summarizes: "The thinking around and the concepts for innovation are well developed. We see this at the clients we work with, and it was confirmed again during this roundtable. However, particularly in the chemicals companies where innovation is an underleveraged asset, we also see is that there is a growing need to 'professionalize' innovation.

"Our clients are often very skilled at creating innovations, but not set up to manage them. As discussed today, there are many opportunities to make the generation, capturing and implementation of ideas more effective: by optimizing the customer interface through effectively integrating R&D with sales and marketing, by stimulating effective collaboration within companies, motivating people and by the strict use of procedures and metrics to measure results. These operational improvements, plus a better realization of the value of your innovation, can change the face of your business."

INNOVATION VALUE

Setting the scene

In May 2007, to generate input for the roundtable, ICIS and Celerant sent out an email questionnaire to readers of ICIS Chemical Business, inviting them to give their views on the importance of innovation to their company and the issues they perceived as important.

Survey findings

Innovation is important and growing in importance.

Of the respondents to the survey, 70% thought innovation was a very important part of their company strategy, with a further 46% describing it as fairly important. Over two-thirds (68.5%) agreed that innovation had become more important within their company over the past five years, with just over one-quarter stating importance had not altered.

When asked about level of expenditure on research and development (R&D), two-thirds of respondents' companies spent up to 5% of turnover on innovation, with one-third spending more than 5%.

Most respondents said that innovation expenditure has increased (57%) or remained the same (41%) in absolute terms over the previous year, but that as a proportion of turnover, only 38% reported an increase, and 54% said the expenditure ratio had remained the same.

Meanwhile, 8% said the amount spent had decreased. Most companies have kept a level head count in R&D (56%), but one-third of respondents said their company had increased its head count, although 10% had seen a decrease.

What drives innovation?

The most important drivers for innovation were new product developments to enter new markets or to remain competitive in existing markets this was seen as very and/or fairly important by 90% of respondents. Next came improvements to existing products, followed by process development for either cost reduction or sustainability/environment reasons - which was seen as very or fairly important by 75-80% of respondents.

When asked about where ideas for innovation came from, respondents put customers highest (74%) and their own R&D team next highest (42%). Least important were external partners (only 20% saying they were very important and 20% describing saying they were not very important) sales and marketing teams occupied the middle ground.

Only 37% of respondents said their company had established a dedicated incubator unit to foster business innovation and ideas.

CHINA CONCERNS

China reared its head for a number of reasons during the discussion. Topmost, of course, were the difficulties over protection of intellectual property (IP) for Western companies doing or hoping to do innovation in China. But there were also concerns over recruitment and retention of skilled, and increasingly more expensive, Chinese researchers and the longer-term impact on Western players of China's own innovation strength and potential.

Anssi Soila of Kemira asks: "What is really going on in China today, and what are the future scenarios?" He sees a rise in Chinese intelligence and education coming through, which will be difficult to compete against. Martin Riediker of Ciba agrees, adding that China has high ambitions to become a technology exporter, and sees markets in the West as an opportunity. "China has 20- to 25-year long-term plans for this, and the movement is powerful as it is centrally driven."

On the key IP concern, Robert Kirschbaum of DSM says he does not believe there would a major problem in China if violation of IP were handled in a better way. And, says Riediker, as China develops its own technology, the central government will move to better IP enforcement. Alfred Hackenberger agrees, saying the problem is not so much the patent system - which is similar to Europe's, nor state enforcement, but enforcement at local level.

There are, of course, issues of keeping IP within companies, given the more rapid turnover of R&D staff in China, and the need to ensure that key technology does not seep out.

Babette Pettersen says that her company, Dow Corning, is not investing in R&D in China, for all the reasons given above, but is entering manufacturing here and finding plenty of talent in the country on the commercial side.

ROUNDTABLE PARTICIPANTS

Joint chairmen

Roger van den Heuvel, head of process sector, Europe, at Celerant Consulting

John Baker, global editor, custom publishing, ICIS Chemical Business

Around the table

Len Berlik, independent consultant

Alfred Hackenberger, president, specialty chemicals research, BASF

Robert Kirschbaum, vice president, materials innovation, DSM

Gernot Klotz, executive director, research and innovation, Cefic

Dominique Montjean, vice president, operations and head of innovation capability, Celerant Consulting

Babette Pettersen, global marketing director, business & technology incubator, Dow Corning

Martin Riediker, chief technology officer, Ciba Specialty Chemicals

Anssi Soila, chairman, Kemira

Claus Steinborn, executive vice president, global head of R&D, Solvay Pharmaceuticals

Also present

Wiebe de Vries, Celerant Consulting

For more on Celerant, go to www.celerantconsulting.com or contact Wiebe de Vries at wiebe.devries@celerantconsulting.com

For more findings, contact john.baker@icis.com

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