The Best Investment Lies not in Chemical Product R&D, but in Business Model Innovation

15 March 2019

The chemical industry is known as a world leader in product research and design. Innovation is a core feature of a science-based industry that has made fortunes out of the development of cutting-edge materials. Gore-Tex, Nylon, and Kevlar are clear examples of chemical product innovation that has transformed our world.

At present, the chemical industry invests heavily in researching new products. This year, the US chemical industry alone is predicted to spend more than $70 billion on research; almost 10% of the value of total US chemical industry output.

However, some chemical industry heads are beginning to question the value behind such massive investment.

As chemical industry consultants at Bain and Company report, “The nature of innovation has changed, and there are fewer breakthrough chemicals and compounds.” Adding that, “… research finds that while two-thirds of executives say innovation is a top priority, less than 25% believe their companies are successful innovators.”

In fact, Bain’s analysis of chemical industry professionals’ thinking was that, “… many senior executives see R&D as something of a black box and don’t understand why returns from innovation are not higher.”

Instead, chemical industry leaders are turning to business model innovation, finding a better return for their investment in reorganising their companies than in searching for miracle chemical products.

As early as 2008, the Boston Consulting Group found that, “business model innovators have been found to be more profitable by an average of 6% compared to pure product or process innovators.

Meanwhile, business models are becoming outdated at an ever-increasing rate. “In the past 50 years, the average business model lifespan has fallen from about 15 years to less than five.”

This is evident in the number of chemical industry M&A’s witnessed during the past decade. It is also indicative of the value seen in major business model overhaul in the chemical industry, with the $130 billion merger of DowDuPont soon being followed by a restructuring program that divides the business into three parts. This, according to the investment journal MotleyFool, is “… projected to save $3.3 billion in cost synergies.”

This places a chemical company’s business model as a core location for investment. But is major company re-structuring just for large chemical corporations?

Chemical Industry Business Model Innovation

Maybe not, as a recently published report in the online Journal of Business Chemistry, believes that there is also value in smaller chemical companies re-evaluating their business models.

The study’s authors, Martin Geissdoerfer (a doctoral researcher at Cambridge University) and Ron Weerdmeester (a management consultant at PNO), focused on developing business model theories that put flexibility and location at the company’s core. Both of which are easily applied to smaller chemical companies, finding value in adaptability and increased productivity through shorter supply chains.

The analysis was based on proposals by the European Commission Horizon 2020 project, which outlines the advantages of, “Business models for flexible and de-localized approaches for intensified processing.”

As a result, the study developed, “… four business model archetypes (BMA) that facilitate this re-localization: decentralization and modularization; mass customization; servitization and product service systems (PSS); circular business model, by name Re-use, Recycle and Sustainability (RR&S).”

The outcome was a framework for the dynamic evaluation of business models, rather than a static approach that limited business model innovators to set time-frames. This framework has been called INSPIRE, and it contains two core aims for chemical companies and other processing businesses;

  1. “Paving the way for dynamic monitoring of key supply chain parameters and factors (e.g. labour costs, production costs, raw material availability, market attractiveness, financial stability of suppliers, etc.) and analysing the long-term impact of the novel business model proposed;
  2. Considering the possibility of switching from one business model to an alternative in the medium term.”

The report also outlines how in rapidly changing and volatile markets, flexibility is a key factor to strengthen a chemical processing business.

Adaptability is key

Specifically, they state that, “In order to react to fluctuations in terms of demand or feedstock/energy prices, companies should be able to adapt production accordingly while being cost efficient at the same time (capacity flexibility). Likewise, companies should be able to switch to another product (product flexibility). In this context the innovation flexibility denotes the ability to carry out R&D and pilot settings at production sites. Another aspect relates to the location. Either the place of the production or the production plant itself should be easily moveable (location flexibility). Furthermore, companies should be able to handle different kinds of feedstock (feedstock flexibility).”

If a chemical company is to remain competitive, it can no longer hold firm on any single business approach. Modern chemical businesses must be far more agile and adaptive to ever-changing situations, and therefore their business models must also be flexible and adaptive.

Innovation will always be central to chemical industry growth, yet it is incredible that such large sums of money are being invested in chemical product R&D while investment in business model development is so often overlooked. In fact, when it comes to innovation, is the chemical industry simply doing it wrong?

Photo credit: Freeimages