Getting the balance right

Innovation is critical. Back in 1956, Nobel laureate Robert Solow discovered that 88 per cent of economic growth is attributable to innovation. His model and the figure has been much debated since. But the chemical industry is in no doubt about the importance of innovation. ’Without innovation, the economic future would be bleak.Innovation is a fundamental means of differentiation. It is key to success,’ says Werner Wenning, chairman of the board, Bayer.

The major chemical companies spend a considerable amount in pursuit of this success, with many spending over three per cent of turnover on R&D.

In 2004, Bayer spent around € 2.3bn (?1.6bn) on R&D, over 50 per cent of which was in healthcare. This figure represents around seven per cent of turnover. Meanwhile, Degussa spends around € 350m per year. This equates to 3.3 per cent of turnover but it aims to increase this to four per cent. DSM spends a similar amount - around € 300m, or four per cent of turnover, on R&D. DSM Venturing and Business Development vice president innovation Robert Kirschbaum says the spend is rising as the company’s portfolio becomes more focused on specialities.

Innovation in the chemical industry is expensive. The time it takes to develop new products and technology is vast. ’It takes six to 10 years to make a real new business. In that time you spend € 5-25 million overall on innovation. The new business has to have a turnover of € 50 million to justify it,’ says Michael Droescher, senior vice president corporate innovation management, Degussa.

Bayer Innovation’s managing director Fred Heiker stresses that major products in Bayer’s portfolio, such as Makrolon, were not core when they were first developed. ’It can sometimes take 30 years before an invention becomes a big product,’ he says. The challenge is to be part of these new markets, says Droescher.

Traditionally, innovation in the chemical industry has been centrally focused and technology driven. Companies had big central research units working for the whole group.

There are obvious benefits to this approach. Dieter Jahn, head of university relations and research planning, BASF, says that synergies between departments can be exploited, the technological strength is large, and the external profile is high. BASF tries to retain these benefits and combine it with a customer-driven approach for innovation. Consequently, BASF has a research structure where it maintains central technology platforms that are used by all business units through their R&D projects.

The industry is, however, increasingly moving away from this model, which many see as being too far removed from the market and too technology-driven, with the risk being that it will generate too much ’hobby’ research.

Getting the balance right between customer and market-driven incremental research and development, and longer term, higher risk activities is at the heart of corporate innovation programmes.

The model being favoured by many of the major chemical companies, Degussa, Bayer and DSM for instance, is to spread the R&D function around the business units to get closer to the customer to ensure research is more market-driven and is meeting customer needs.

The downside to this model is that the business units have the needs of the business paramount in their targets and goals, and this means that shareholders need to be catered for. The outlook is consequently short- to medium-term, generally a maximum of three to five years. ’The problem of allocating research to the business units, if they only report to business unit leaders is that they are missing the long-term prospects,’ says BASF’s Jahn. Bayer’s Heiker agrees: ’Only looking at shareholder value is deadly. It is absolutely contradictory to basic inventions and breakthrough innovation.’

With the business units focusing largely on incremental research, chemical companies have recognised the need for a group, or unit, that looks further ahead with the aim of finding breakthrough technologies or products. These units also address the issue of any lack of synergy between the business units, by focusing on projects that span several business units, as well as looking outside the current portfolio at new growth markets and other projects that would be considered to be too high a risk by the business units.

These units are responsible for watching markets and technology. To ’be the spider in the web, so that if somebody breaks a silk thread, we feel that something is happening,’ says Degussa’s Droescher.

Although BASF favours a central research approach, which includes a budget for exploratory research, it has set up a subsidiary company BASF Future Business. This market-driven group within BASF’s R&D function looks for future business opportunities beyond current business activities. The company also uses the central technology platforms.

These innovation groups are also involved in venture capital funding, working with universities and partnering with start-up companies. This approach is embracing open innovation, a term introduced by Henry Chesbrough in his 2003 book Open Innovation: the new imperative for creating and profiting from technology.

Chesbrough noticed the old model, of obtaining competitive advantage by funding large research laboratories to develop new technologies that will make new products to plough money back into research, began to change in the 1990s.

The open innovation model allows technology to be licensed in or out of a company. Chesbrough also argues that start-up companies should be viewed as laboratories that test market real products to real customers. He comments that the more progressive companies have formed their own internal venture groups, and many in the chemical industry have done so.

DSM advocates this approach, which Kirschbaum explains means that at any time in the innovation process a decision can be made to continue with a project, stop, or spin it out. This approach includes selling businesses to competitors where they might have a better fit. Also, teams that have developed a business plan that does not meet DSM’s requirements are able to take that idea, if they secure funding, and leave DSM.

BASF also believes in this concept, saying that outside cooperation is crucial. The company partners with research institutes, universities and start-ups, which it finds are a good vehicle to transfer results from university and research institutes to business. It, too, is happy to sell its ideas or businesses to third parties, if it does not fit with BASF’s existing structure or strategy.

One example of open innovation is the Dutch Polymer Institute. It is a public-private partnership between the main polymer producing and processing industries in the Netherlands and knowledge institutes (universities and the Netherlands research and technology organisation TNO). It focuses academic research on issues that are relevant to polymer industries. It is funded by industry (25 per cent), universities/TNO (25 per cent) and the Netherlands ministry of economic affairs (50 per cent). The companies involved include: Akzo Nobel, Dow Chemical, DSM, Basell, Philips, Degussa and Sabic.

The aim was to bridge the gap between academic and industrial research time horizons, says DSM’s Kirschbaum. Early on, people thought the companies involved would fight for the successful projects. ’This has not happened,’ says Kirschbaum. Companies identify at an early stage which projects they are interested in and there has been no conflict.

The thrust of innovation is not all about the next big market, or the next hot technology. Incremental development is also vital as are developments and innovations in customer service and processes.

’Innovation is not limited to R&D, but involves all functions of a company, starting at sales and marketing, via production and R&D services and logistics and onto new business models. To be effective, ideas and the search for innovation and improvement must be implemented within the daily work of all these units,’ says Stefan Marcinowski, member of the board of executive directors and research executive director, BASF.

Innovation also needs the right people. ’Ten years ago the problem [with innovation] was process, five years ago it was funding. All the time the problem lies elsewhere. The real blockers are to do with people,’ says Trevor Davis, IBM Consulting Service.

The innovation process needs different people at different stages. Understanding what type of people are needed at each stage and how they can best work together is as critical to innovation as generating the ideas in the first place.

Some companies are using profiling techniques, such as Kirton Adaption-Innovation Inventory and Myers Briggs, to help select the best people for the job and help understand how teams can best work together.

So what sort of people are best for innovation? At the outset you need inventors, who have the vision of what could be. This can be a challenge for companies.

’We would never have hired most of the guys who made big inventions because they were obscure people,’ says Heiker. The point he is making is that creative people do not necessarily make the best team members and are often not employed by companies. But these people are important, says Heiker. Innovation needs a few people who follow their own imagination, ideas and vision. But it is important that managers have the judgement to decide who is worth protecting and encouraging and who is not.

Jack Hipple, consultant with Innovation-Triz in the US, agrees. He believes the emphasis on team working over the last 10-20 years is not helping innovation. The people who generate new ideas are not generally team players, he explains. For innovation to be successful, companies need to find a way to tolerate the friction this will generate.

There is also friction between R&D and upper management. The two areas talk two different languages, says Thomas Bieringer, corporate development head of innovation, Bayer. ’We need to create a culture where someone who is looking for a new area is as accepted as someone in, for instance, sales,’ he says. ’There has to be trust in people,’ says Bayer’s Heiker.

Once an idea reaches the next stage, people who are able to focus on bringing the product to market are needed. ’It is important to have enthusiastic, resilient people who are able to finalise a feasibility study and answer the question ’what should we do now?’ because nine times out of 10, the answer will be not to continue,’ says DSM’s Kirschbaum.

Once a start-up has been founded, the needs change again with the emphasis on leadership, market focus and negotiating skills. And as Heiker puts it ’they need entrepreneurial spirit, to be willing to go into a company and run it’.

People at all stages of the process need to have the freedom to be innovative, to take time away from their day to day work. Some companies allocate employees a certain percentage of time for thinking about and finding new business. But you can’t make people do this, says Degussa’s Droescher.

’Sometimes people need to spend 100 per cent of their time on future business, at other times 150 per cent of their time needs to be spent on core activities,’ says Heiker. Balancing this comes down to leadership and is helped by the use of project houses and short-term project groups.

These techniques are among many that companies use to generate ideas. And a lot of ideas are needed to produce just one new business line. Droescher comments that eight years ago he was part of a group of nine people responsible for generating new ideas. From 200-300 ideas, they investigated about 30, each of which got about two to three weeks of paper investigation. Of these, eight, with the potential for a turnover of € 50m, were put forward to the board. Four received approval and two made it to market.

Companies need to create a culture of innovation and idea creation. Stimulating ideas can be as simple as an ideas box. Some companies find these to be particularly successful. For instance, DSM gives a bonus for successful ideas, which can be as much as € 10-15 000. It has generated a number of successful improvements in this way.

Innovation events and workshops are another route that companies take. Shell uses workshops in its Gamechanger Programme. The programme, which employs two people, was established in the chemicals business in 1999. It has its own funding to support projects and aims to find breakthrough innovation.

Ideas can be generated by anyone at anytime. Shell also runs structured company workshops and ’hunter’ groups which meet every two to three weeks to discuss developments and come forward with proposals. Ideas also come from work with customers and universities. All ideas are fed into a stage gate process for assessment.

Awards are also used by companies to motivate staff and stimulate innovation. For instance, DSM has a quarterly research award, that is primarily for project teams whose achievements have directly resulted in an increase in the company’s business. Degussa has three annual awards with substantial prizes - € 25 000 each for the team that has developed the best new product, process or application.

One novel idea is Degussa’s Creavis venture bonus plan. The scheme, which has been running for a year, allows the future business Creavis team to invest part of their annual bonuses in the start-ups being run by Creavis.

If after five years the start-up has reached 50 per cent of the target in its business plan, they get their investment back with interest. If it meets the targets, they get double their investment, rising to five times the investment for very successful start-ups.

Out of 65 people eligible, 55 have taken part, investing a total of around € 100 000. ’The scheme is now going into its second year. It will be interesting to see how much is reinvested. For us it is important to see if they believe in the project. If they invest again, they believe. If they don’t, there’s a question mark,’ says Droescher.

The scheme is still an experiment, but Degussa plans to roll it out further within the company.

Whatever method is used, the companies all have the same goal. ’The most important challenge is to bring science and the market together to find solutions,’ says BASF’s Jahn.

Further Reading

Henry Chesbrough, Open Innovation: the new imperative for creating and profiting from technology, Harvard Business School Press, 2003