Profiting from Innovation

Skeptics take a look at the chemical industry and see a collection of mature businesses with few innovative products and processes to offer. Wall Street typically sees research as a costly item that absorbs money often better directed to shareholder dividends. Even some scientists seem to believe that the road to career success in the corporate world is not through research but through sales.

In a rebuttal to those who think little new and worthwhile comes out of the chemical enterprise, nearly 70 R&D mavens gathered in Cincinnati earlier this month to discuss innovation as a corporate good. Innovation may mean many things to many people, but to those at a joint management conference of the American Institute of Chemical Engineers and the American Chemical Society, it is most of all a source of value creation.

Innovation: The Engine for Growth was the topic of the conference. Hewing to that theme, chief technology officers such as Thomas M. Connelly Jr. of DuPont, Gary S. Calabrese of Rohm and Haas, Miles P. Drake of Air Products & Chemicals, and Stanley A. Gembicki of UOP discussed ways to get the biggest bang for the corporate R&D buck.

Representatives from consulting firm Booz Allen Hamilton did not attend, but findings in the firms recent study on research spending by the worlds top 1,000 corporate R&D spenders in a variety of industries caught a lot of attention. The study concluded that there is no statistical relationship between R&D spending levels and nearly all measures of business success, including sales growth, gross profit, operating profit, enterprise profit, market capitalization, and total shareholder return. Many of the speakers took issue with Booz Allens conclusions, particularly for the chemical industry.

L. Louis Hegedus, senior vice president for R&D at Arkema, said chemical producers have virtually unlimited opportunities available to them. Hegedus, who chaired the conference along with consultant Joseph V. Porcelli, pointed out that chemists have synthesized about 14 million compounds, yet only 100,000 are in commercial use today. The challenge, he said, is to know which R&D projects have the best profit potential in an industry that also has to deal with issues such as globalization, sustainability, and a changing workforce.

People differ widely in how they view innovation, said Air Products Drake. But in his estimation, innovation is inevitably tied to value creation realized through a new product, process, or service. To accomplish this, he said, Air Products embeds technology managers in the firms business management teams to help reconcile business needs with the firms technical capabilities.

With annual R&D spending at about 2% of sales, Air Products recognizes that it must leverage its limited resources, Drake said. Sometimes that is done by transferring technology developed in one area of the company to another. Or it may come through the use of joint ventures, partnerships, or research collaborations with universities to bring new technology in. We cant invent everything, he said.

To get a portal on emerging materials companies, Air Products looks to other outside partners. For instance, the firm is a limited partner in the NGEN Enabling Technologies Fund, which invests in materials-related start-up firms. Other fund investors include BASF, DSM, Unilever, Canon, Honda, and DuPont.

And like other technology officers at the meeting, Drake acknowledged using network solution providers such as InnoCentive and NineSigma. The former can post a scientific problem on the Internet and offer a cash reward on behalf of a firm to anyone who comes up with a solution. The latter can assemble a network of potential corporate and academic collaborators to help a firm find a solution to a problem.

Is innovation a buzzword or a lifeline for the chemical industry? asked Thomas Weskamp, a Cologne, Germany-based consultant with McKinsey & Co. The key to innovation is to translate what you learn in the market into a scientific and technological approach, he said.

What worries Weskamp is the lack of enthusiasm he sees among chemical industry researchers for careers in R&D. He has noticed, in Germany in particular, that many technically trained workers start in research hoping to move into sales as quickly as possible. They do some amateur research but see real career advancement on the sales side of the business.

Part of the problem may be that the technical guys are not running technology business any more, said James A. Trainham, vice president of science and technology at PPG Industries. Instead, experts in finance are running these businesses, and for them, innovation is something they find difficult to grasp.

Cutting costs and reducing capital intensity isnt enough to give a company a competitive edge, he said. A firm really has to be innovative. Convincing upper management to back technology advances is important if a firm is to expand its business and bring new products to market.

But Trainham added that it takes a technical person with marketing training—a different breed of cat—to bring new things to market. These are exactly the people many corporate cultures have a hard time accepting because they look at what might be and push others to see it their way. We need to identify and nurture such creative people, he said, but often they are the first to go in a layoff during a business downturn.

Too much order stifles creativity, Trainham observed. On the other hand, without some order, creativity is lost. For creative people, failure cannot become a professional death sentence, and a company that hopes to get out ahead of its competitors has to learn how to nurture such people.

F. Peter Boer, former chief technical officer of W.R. Grace and now president of his own firm, Tiger Scientific, pointed out that many executives view R&D as an expense. But, Boer said, R&D is not properly an expense since the payoff is in the future. He views money spent on R&D as a kind of investment that may or may not provide a payback. But the better a firm selects a diverse range of potentially rewarding projects, advancing those with the best market prospects, he said, the better it can reduce its risks and maximize profits derived from investments in R&D.

Innovation, DuPonts Connelly told the conference, is not necessarily about invention. It can also mean combining existing technologies in new ways that create value. And while he admitted that DuPont relies on well-defined processes—such as the data-driven Six Sigma quality assurance program—to manage the research process, sometimes you have to throw the rule book out. The genius of R&D management is knowing when to let people free and when to hold them back, he said.

At Rohm and Haas, innovation comes partly through extensions, both minor and significant, of current technologies. The firm also takes leaps into new technologies that are riskier but promise large returns.

Overall, Calabrese said, the companys mission is to keep coming up with cool stuff on a regular basis. To make that happen, business executives spend time on innovation. Chief Executive Officer Raj Gupta, for instance, chairs a growth board at Rohm and Haas. The firm also runs a website for its technology community that acts as a one-stop shop to break down walls between research disciplines.

And companies cant give in to scientists urge to get everything perfect before releasing an innovative product to a customer. Get it out even if its buggy, but fix it fast. Microsofts Bill Gates does that, and virtually all of us continue to buy Windows software, Calabrese advised.

Although the companies at the meeting all take different approaches to innovation, there was no doubt of the value that R&D has created and will continue to create for even the most traditional chemical firms—if they manage the innovation process wisely.