I was very happy to read the interview that BüFa CEO Felix Thalmann gave to Chemanager a few days ago (here, only in German). Firstly, because he emphasizes the importance of innovation to differentiate a mid-size chemical company from bigger players that can leverage economies of scale. Secondly, because he juxtaposes traditional product innovation with digitalization – and identifies in the interaction between the two a significant source of potential growth and value. Thirdly, because he proudly confirms that most of BüFa developments – though they have an internal R&D – are achieved through “open innovation”, i.e. by involving selected customers, suppliers, but also universities and start-ups, in the early stages of product / service conception.
Now you may ask: what´s new? Nothing, actually: if you were working at Apple – that developed the Iphone mostly on external patents and has independent, certified programmers developing its apps , or at Genentech – where almost half of the investigational drugs in the pipeline involve some sort of alliance with an external partner, these notions would be part of your corporate DNA.
In the chemical industry, though, things are different. The industry has 300+ years of history, with many players that have been founded more than a century ago and that made it to these days through good and bad times, developing a set of values that proved both resilient and averse to change. When something does not work out, you often hear someone who claimed “It´s obvious, it was not invented here!”. The good news is that more and more executives from the chemical industry are recognizing that digitalization has revolutionized entire sectors – from communication to media to financial services – and is moving very quickly into manufacturing and material processing sectors. For most businesses, digital transformation is not an option anymore and those who don´t accelerate the pace of digitalization now will be exposed to significant risks in the not so far away future.
So: how can open innovation drive digital transformation in chemicals? In fact, I see three main ways:
- by providing better market insights and understanding changing / unmet needs before the competition,
- by acquiring new digital technologies quickly that help complementing the current traditional offerings or else drive functional excellence up / operational costs down, and – maybe most importantly,
- by driving internal knowledge & learning, i.e. by exposing a company´s workforce with new digital technologies and ways of working (eg, agile project management / scrum) that can be transfered / internalized.
In concrete terms, a chemical company has the possibility to choose among a long list of mechanisms how to drive open innovation with external organizations (see exhibit below), and the right mix shall be defined on a case-by-case basis, in line with the overall innovation strategy.
Let´s give a closer look at five of these options that are especially interesting:
- Scouting & venturing, i.e. the regular and systematic scanning for / ranking of new technologies in a specific business / technical space, and the consequent approach of the owners to verify common business opportunities. If the scouting is directed onto digital technologies, the contribution of this open innovation approach is quite obvious: the possibility for a company´s management to get a quick understanding of the relevant digital technology environment and capture potential opportunities without big efforts. Some bigger corporations – like BASF or Evonik – have their own corporate venture capital (CVC) units that carry out scouting; others – because of different strategy or lack of size – outsource it to specialized consultants or get a stake in a venture capital / seed fund, like Bayer Crop Science with several VC funds, or BüFa with HTGF (for an overview how seed funds work, see here).
- Strategic alliances, i.e. the cooperation between two or more companies to complement their competencies / disclosing – at least partly – their knowledge, by remaining separate and independent. Strategic alliances have traditionally been made with critical suppliers or customers, but can be very well fit into the digital age, like the case of Evonik partnering with IBM to co-develop an Evonik-specific chemical & life sciences knowledge corpus
- Ecosystems, i.e. the community of suppliers, manufacturers, technology owners, intermediaries and customers that gravitates around the same set of needs. The concept of ecosystems in business goes back to a 1993 HBR article, but gained momentum in association with the digital revolution. A good example is the AgTech ecosystem that includes – beyond growers and ranchers – agroequipment manufacturers like John Deere, digital start-ups like Farmer’s Edge (that helps growers managing farmland variability through satellite imagery and precision technology) or AgCode (that sells a big-data solution for vineyard management), as well as chemical companies producing pesticides, fertilizers, or growth agents, like Syngenta or Bayer Crop Science.
- Innovation platforms, i.e. a network of industry and academic partners, start-ups, and experts around a company or a theme to share ideas and drive innovation. For example Henkel created its own innovation platform called Henkelx to accelerate digitalization within its four walls, one of its strategic priorities for 2020. Henkelx is organized as a separate operating unit within the corporation and facilitates knowledge sharing and idea generation through new collaborative formats and live events (Henkel show & tell, beautiful minds, and alike).
- Spin-off, i.e. the separation of a company unit into a new legal entity. While it may seem counterintuitive (when you spin-off you apparently lose competencies!), an important rationale for spin-off can be to set resources and competencies free from the original company rules and boundaries so that they can develop more autonomously and flourish. This may well be the case if you want to develop some promising digital capabilities that do not find appropriate attention in the current governance setting. As an example, BüFa (again!), founded Chembid, a B2B e-commerce platform for chemicals with several features in common with Alibaba. Such a platform would have never had the same chances of success if it remained under the original branding and organizational setup of its parent company.
An important caveat: the examples I have mentioned above are rather “digital front-runners” in the chemical industry, not really representative of the average: the overall investment in startups by chemical companies is generally fairly low and – at the same time -most chemical companies still struggle to bring their own digital transformations up to speed. Still, I remain optimistic. Open innovation has a huge potential to contribute to the digital transformation of chemical companies: the question is not “if”, but “how”.
An old Chinese proverb says „When the winds of change blow, some people build walls and others build windmills“. Well, I think that open innovation is a big windmill for the digital transformation wind that is blowing on the chemical industry.
About the author
Lorenzo Formiconi is managing partner at execon partners. He is an expert in operations management and digital transformation, working with clients in the chemical industry since 20 years.
For further information contact Lorenzo Formiconi via email or phone.