Although it is good news that chemical innovation creates value in general, the senior management of chemical companies can get another important message from this article: the return of chemical innovation can be significantly improved.
Three ways to improve innovation performance
Although it is good news that chemical innovation creates value in general, the senior management of chemical companies can get another important message from this article: the return of chemical innovation can be significantly improved. Our analysis shows that changes in at least three areas can have a significant impact:
Modify the innovation portfolio balance. The difference in returns between projects in the low market familiarity and low technology familiarity quadrant and projects in other categories is staggering - twice the difference. Obviously, this new market and new technology area is much more risky than other areas, but in the chemical industry, the compound effect of the long-term development time frame on this risk and therefore on the internal rate of return seems to be unknown.
Many companies believe that only entering this field can really change their performance. Although this idea is tempting, our experience shows that entering new technologies for well-known markets, or using well-known technologies to enter new markets, can produce similar transformation effects - but with much less risk, shorter time frame and higher returns. In a company's Innovation Portfolio, comparing these two categories with new markets and new technology (not excluding all new to new investments) can significantly improve the overall return.
Ability to improve market insight. Most chemical companies are good at understanding the needs of existing customers in the existing market, but they are weak in insight into new markets. In fact, the test results in our matrix show that the innovation failure rate in new market and familiar technology space is similar to that in familiar market and new technology space. Therefore, the risk of market entry is similar to that of developing new technology.
However, we find that most chemical companies pay much less attention to market insight than to technology capability. Although developing market insight is neither easy nor cheap, it is much faster and cheaper than developing technology; investment in this field can reduce risks, accelerate commercialization and increase returns. If done well, market insight is actually the "power multiplier" of technology investment.
Improve innovation discipline. Many innovations, especially those with new technology, need to deploy new capital in the process of commercialization. If not properly implemented, this additional capital requirement can easily undermine innovation returns. Too many companies believe that in order to meet cost targets and qualification requirements, new products must be launched from large-scale factories. As we have pointed out in previous works, this view is wrong: the cost of adopting chemical and material innovations is often higher than that of existing products. Instead of investing a lot of money to build world-class factories, enterprises should almost always take a prudent approach to establish flexible pilot plants, allowing property adjustments to meet market demand. This approach reduces overall risk in two ways: it reduces total capital expenditure and increases the likelihood of adoption.
More broadly, this article talks about the importance of innovation discipline and the importance of finding the right model for innovation and commercialization, the lack of which reduces the possibility of success. According to the dynamics and technology of the target market, the adoption of clear and disciplined innovation methods usually leads to higher success rate and return. Examples of these specific target market models include the entrepreneurial or innovative venture capital approach, which provides clear guidelines on the trade-off between risk and return; a platform approach that combines a set of new technologies based on end market demand and dynamics; and a real option based approach that allows companies to "buy or sell" based on the performance of a project at a specific stage.
In view of the speed of technological change in downstream industries, these industries rely on chemicals to achieve development, so it is very important for chemical companies to continue to innovate. The methods outlined in this article can help improve the efficiency and effectiveness of innovation, and increase returns. However, they cannot guarantee that the chemical industry will continue to support the pace of progress in key industries such as electronics and energy. To achieve this, we need the joint efforts of visionary chemical industry leaders, the establishment of close cooperation with downstream chemical users, and the policy environment to encourage investment and technology development.