Chemical Industry Wrestles with Growth Through Innovation
At the dawn of a new century, the chemical industry finds itself an essential source of materials for the rest of manufacturing, yet it lacks the profitability and growth prospects of the industries it serves. Finding winning strategies in this environment is the tactic being employed by Arthur D. Little, Inc. (Cambridge, MA), in a series of meetings, publications and consulting services. Most recently, ADL sponsored a meeting, the Chemical Industry Innovation Forum (New York, Dec. 9-10). A summary document of that meeting is in the works; meanwhile, Robert Henske, SVP at ADL, shared some insights with Pharmaceutical Online about the trends driving the industry today.
"The forum's theme was "Blasting the 20/15 Barrier-Achieving ROCE and Growth Targets Over The Cycle," notes Henske. "This comes in part from the goals that leading chemical companies often state for their performance: return on capital employed (ROCE) of around 20%, and bottom line annual earnings growth of 15%." It is especially ambitious, he notes wryly, in that the worldwide averages for these measures in the chemical industry have been around 8.5% and 1.2%, respectively. "The challenge is, how can a company get from those levels to the ones that they are targeting?"
Overall, the industry finds itself in a continuing rationalization, under which key products or technologies are being concentrated in the hands of a smaller number of players. (The recent go-around in which DuPont and NL Industries attempted to buy Tioxide, Ltd., ICI's titanium dioxide business, is a case in point.) "The rest of the manufacturing world is beginning to look on commodity products from the chemical industry as a utility—something that is available with the same specifications, and more or less the same price, worldwide," says Henske. Certain companies dominate in a few products, and are the lowest-cost producers with the best technology "platform."
The specialty chemicals arena is now undergoing a similar "commoditization," says Henske. The challenge is to identify applications that require a combination of "science" (product) and "art" (expertise); in some cases, the end result is a service business; in others, a proprietary product position.
Technology, obviously, plays a critical role in developing such positions, whether for commodities or specialties. There are two trends influencing how companies are structuring their R&D programs these days, according to Henske. One is the return of central R&D departments; the other is an emphasis on organizing company divisions along market rather than product lines.
Middle-management 'white space'
Many companies disbanded their central R&D functions over the past decade, choosing to align their R&D with operating divisions. The result has been success in focusing research on meeting marketplace demands; the downside has been a drying up of the new-products pipeline. A parallel situation—the "reengineering" of company operations to eliminate non-value-added middle-management functions—has left a lot of "white space" on the organization chart, says Henske. This level of management had also been the source of many new product ideas.
A renewed emphasis on more basic research, managed by a central R&D office, is beginning to refill that pipeline. Companies are succeeding in managing their R&D more rationally, using many of the same portfolio management techniques found in the venture capital community. In fact, says Henske, several companies have sent some R&D managers out into the venture-capital community itself, to act as scouts for new technology, and to help their employers get an early look at new technology.
Speaking of new technology itself, the current emphasis on life sciences in the chemical industry cannot be overlooked, says Henske. Numerous chemical majors, such as Monsanto and Hoechst, have "demerged" their chemical operations from their life sciences ones. Healthcare and food production are two of the well-recognized targets of chemical industry activities today. DuPont is currently reassessing its life sciences areas, which are substantial, and looking for crossovers between biotech product development and chemical manufacture. Jack Krol, chairman of DuPont, made a presentation at the December ADL meeting, touting the potential for a biotech route to polyester, a commodity product very important to its fiber production.
ADL wants to help drive this crossover. To this end, the company formed a joint venture with Strategic Food Solutions, a commercial venture of the TNO research organization of the Netherlands last September. Most recently—at the beginning of this month—ADL has created a Life Sciences Focus Group within its Chemical Practice. "Your definition as to what constitutes 'life sciences' as separate from other types of research is as good as ours," admits Henske. "One of the goals of this Group is to find a focus to how chemical companies can deal with the life sciences."
Participants in the ADL Forum included top-ranking executives from Borden Chemical, Great Lakes, J.M. Huber, OxyChem, Reichhold, Rohm and Haas, NOVA Chemicals, Solutia, Sunoco Chemicals, and DuPont. Senior members of ADL's Chemical Consulting Group also participated. The forum highlights and participants' insights from the Chemical Industry Innovation Forum—Blasting The 20/15 barrier - Achieving ROCE and Growth Over The Cycle are being published in a booklet by ADL available in February/March 1999. To receive a copy, contact ADL at: kenny.brian@adlittle.com.