The Chemical Industry Innovation Forum (New York, Dec. 9-10), analyzed variables influencing the profitability and growth of the chemical industry. Sponsored by Arthur D. Little Inc. (ADL; Cambridge, MA; firstname.lastname@example.org), the forum discussed the discrepancy between actual profits and targeted profits in the chemical industry; the redefinition of specialty chemicals as commodities; the major shift in research practices and lab management; and the industry's recent emphasis on life sciences. A summary document of the Chemical Industry Innovation Forum is in the works; meanwhile, Robert Henske, senior VP at ADL, shared some insights about the trends driving the industry today.
"The forum's theme was "Blasting the 20/15 BarrierAchieving ROCE and Growth Targets Over The Cycle," Henske says. "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, because 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 utilitysomething that is available with the same specifications, and more or less the same price, worldwide," Henske says. Certain companies dominate in a few products, and are the lowest-cost producers with the best technology "platforms."
The specialty-chemicals arena is now undergoing a similar "commoditization," Henske says. 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. Two trends influence the way that companies now structure their R&D programs, Henske says. One is the return of central R&D departments; the other is an emphasis on organizing company divisions along market rather than product lines.
Many companies disbanded their central R&D functions over the past decade, choosing instead 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 situationthe "reengineering" of company operations to eliminate non-value-added middle-management functionshas left a lot of "white space" on the organizational chart, Henske says. This level of management had also been the source of many new product ideas.
A renewed emphasis on basic research, managed by a central R&D office, is beginning to refill that pipeline. Companies are succeeding in managing their R&D programs 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. These act as scouts for new technology and help their employers get an early look at new technology.
The current emphasis on life sciences in the chemical industry also cannot be overlooked, Henske says. Numerous chemical leaders, 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 manufacturing. 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 last September with Strategic Food Solutions, a commercial venture of the TNO research organization based in the Netherlands. Most recently--at the beginning of January 1999ADL 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," Henske admits. "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 by ADL in a booklet available in February/March 1999.
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