From science to innovation

C&I Issue 5, 2010

R&D budgets are holding up in some companies but how can the benefits be measured? Neil Eisberg reports

The world is presenting us with ‘more and more enormous, unprecedented challenges’, according to Andreas Kreimeyer, research director, BASF, and the chemical industry will play a key role is solving these challenges. ‘By the year 2050, 2.5m more people, and a total population exceeding nine billion people, will be living on Earth. Around 70% will be living in cities, and the proportion of elderly will grow rapidly. Based on existing concepts, we will need 50% more primary energy by 2030,’ he says, adding that by 2020 there will be 1.2bn cars on the planet. ‘How can we reduce emissions and fuel consumption, and which materials will be used to produce them?’ he asks.

Industrial innovation system

Although one might argue that we are the ones creating the challenges, it is not possible to argue with Kreimeyer’s belief that the chemical industry will play a key role in solving them. ‘It is an important provider of new technologies, materials and precursors, and of ideas and application know-how for almost all sectors and thus an indispensable mainstay of the industrial innovation system,’ he says.

‘Chemistry creates the future,’ Kreimeyer says, ‘for the economic upswing, because only through new ideas will we be able to emerge strengthened from the crisis; for almost all sectors and industries, because with our innovations we provide impulses for new products and processes; and for an environment worth living in, because chemistry is also indispensable in energy management and environmental protection.’

But as Holger Ernst, chair for technology and innovation management at Germany’s Otto Beisheim School of Management (WHU), points out, as well as these megatrends, there are also challenges for the chemical industry from the changing competitive landscape. These challenges include increased global competition, with domestic champions from emerging markets gaining footholds in established markets, for example. Increasing commoditisation, what Ernst also describes as homogenisation, and continued downward pressure on sales and profit margins, are other factors, which also include increasing technological dynamism, with disruptive technologies being the key, and the consequent need for increased R&D expenditures; and decreasing product life cycles, due to changes in customer needs, technological changes and global competition.

‘To meet these challenges requires continuous innovation to obtain significant and sustainable competitive advantages,’ says Ernst, who points out, however, that ‘simple “me-to” strategies are unsuccessful and cost-cutting works only in the short-term. Differentiation of products occurs only through innovative products characteristics, thereby fighting commoditisation and decreasing profit margins.’ Targets for growth can only be reached, he believes, by the continuous implementation of innovation; what he describes as closing the strategic sales gap. But he also warns that missed innovations can lead to life-threatening crises in companies. Sony, for example, despite introducing radical new technology that made portable music possible with the Walkman, missed MP3 technology, even though its major proponent and benefactor, Apple, didn’t even invent the technology.

Successful innovation requires more than just increasing R&D expenditures – innovation management makes the difference, says Ernst. ‘Firms with excellence in innovation management grow faster and more profitable with new product launches than their competitors,’ he says, citing Intel, the computer chip manufacturer as one example. Back in 2001 the semiconductor sector was in a slow economic phase but Intel decided to not only employ cost-cutting but also invested $12m , much of it in R&D, notes Ernst, adding that the company is now reaping the benefits with new products and processes.

Despite the current economic situation, Ernst also reports that, according to US data, R&D expenditure remains stable ‘even increasing’, something that is borne out by BASF’s Kreimeyer. R&D expenditure at BASF increased to almost €1.4bn in 2009, up from €1.35bn in 2008, says Kreimeyer, however, it is expected to fall back slightly in 2010 to €1.38bn. ‘Only with a continuous flow of innovations can we consistently use competitive advantages to achieve above-market organic growth,’ he says, backing up Ernst’s remarks: ‘Continuity of research strategy is important both in good times and also in times of crisis.’

Innovation management

In terms of innovation management, Ernst believes there are a number of best practices that provide a route to success. Top of his list is the establishment of a corporate culture that encourages innovation, followed by a strong technology and intellectual property portfolio, which facilitate the grasping of opportunities. The focus must be on the fostering of an open innovation environment, without the ‘not invented here syndrome’, and the enhancing of cross-functional collaboration both internally and also externally with partners.

A key innovation management best practice is the monitoring and assessment of innovative performance, says Ernst, emphasising that strong patents are an objective, available and comparable indicator of innovation in R&D-driven industries, like chemicals. ‘Innovation leaders have economically valuable patent portfolios and higher firm performance,’ he says, but adds that ‘counting numbers of patents doesn’t necessarily mean success; quality does’.

According to the Wall Street Journal/Patent Board Patent Scorecard published in June 2009, DuPont heads the list of chemical companies, but this is based on the number of citation, Ernst points out. Despite this limitation, he adds, DuPont uses this result to document its leading position in its communications with shareholders and investors on a regular basis. DuPont’s citations are almost twice those of BASF but Ernst asks if this really means that DuPont is twice as good as BASF?

Ernst believes that this ranking doesn’t give a true picture unlike the Patent Asset Index developed at WHU. He says the Patent Asset Index is more accurate as it uses unbiased international comparisons and covers the entire global patent portfolio. It also considers the extent of patent protection on a global basis, while assessing the importance of each individual innovation. The importance of the invention is combined with the extent of patent protection in global markets, which is the market size protected by valid patents and pending patent applications compared to the US market size, to calculate a competitive impact.

In terms of coverage, its assessment starts from the first date of public disclosure of each patent application and measures the market relevance of each patent, as well the overall number of patents held by a company and how many are still valid, which Ernst describes it as a ‘stocktaking approach’.

According to Ernst, important patents usually account for 90% of a patent portfolio, however, he adds that old patents are cited more often than new ones, and all patents are cited more commonly in the US than in Europe. Also he notes that different patent offices can have different practices so adjustments have to be built into the calculations.

Once this process has been completed for each patent family, a cumulative competitive impact is calculated to produce the Patent Asset Index. Using this approach, a ranking for the most researchintensive chemical companies was produced in December 2008. Not surprisingly, BASF, including its Ciba acquisition, tops the list followed by Bayer and then DuPont and then Dow Chemical.

But Ernst says the Index is more than just a way of ranking companies and their innovations, it can also be used to identify possible acquisitions that would strengthen a company’s patent portfolio. By examining Dow’s rating before and after its purchase of Rohm and Haas, Ernst says it is possible to see how the acquisition has paid off, with Dow now catching up DuPont.

It is also possible to use the Index to identify potential licensees for a company’s technologies. Additionally the Index can be used to help measure returns on R&D spends, since it is possible to identify those patents that have resulted in sales increases. ‘It is still just statistics,’ says Ernst, ’but one can end up with a meaningful result.’

And innovation is the key to Europe’s continued prosperity, as BASF’s boss Jürgen Hambrecht reminded German journalists recently. Speaking on behalf of the European Round Table of Industrialists (ERT), he said: ‘We need to combine our strengths and focus on the sole opportunity that we have; we need to be more innovative than our competitors….. Europe is not able to undercut cheap wages in other regions, so it can only be competitive by having better ideas.’

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