Partner and Director, Chemicals
Chemical companies are shifting to a new, multifunctional, more collaborative form of R&D, where growth depends on their ability to engage with the outside world.
A producer of specialty chemicals announces a crowdsourcing competition, inviting outsiders to submit ideas for new products and services—and then it collaborates with the winners to develop them. An agrochemical company develops data-driven guidance on crop cultivation, coinventing their application methods with their farming customers. A multispecialty company shares its research staff and laboratory facilities with universities in Europe and China. And several chemical companies run venture capital units, funding startups with joint research projects in multiple fields, such as food and personal care additives, electronic chemicals, and others.
These are not isolated cases. They are part of an accelerating trend—a shift to a new, multifunctional, more collaborative form of innovation—that we have observed in our ongoing work with leading chemical companies worldwide and in our surveys of industry leaders.
Innovation is as strong as ever in the chemical industry. Our study of publicly listed companies found that they spent, on average, 2.4% of their annual revenues on R&D in 2021, with a few spending more than 6%. This represents a significant investment.
But the style of innovation has changed dramatically. In the past, chemical company research was conducted by in-house chemists focused on developing and commercializing their own company’s breakthrough molecules, differentiated formulations, and novel processes. Outsiders were viewed as competitors and opponents. Today, a typical R&D effort involves multiple disciplines beyond chemistry, including artificial intelligence and analytics. Labs routinely engage with external parties, including customers, academics, and startups. Revenue streams go beyond selling molecules to include problem-solving services that incorporate sophisticated analytics, tailoring new offerings to serve specific applications. All of this is done with an eye toward addressing customer problems as they arise. Accordingly, the role of corporate innovation teams needs to be revisited.
Several factors have accelerated the shift toward more collaborative innovation in the chemical industry. They are:
Different subsectors in the industry have responded to these factors in different ways. Based on interviews with experts across the industry, we have identified agrochemicals as the segment with the highest share of external resources in its innovation spending. (See Exhibit 1.) This is because of the complexity of agrochemical innovation, which incorporates molecular research and regulatory trials, as well as digital technology used in precision farming and dispensing. On the other end of the spectrum are base chemicals and basic plastics. Driven by the commodity nature of their businesses, these sectors leverage external partners more sporadically to gain access to particular capabilities.
Chemical companies employ a variety of new or rethought strategies to source and manage external inputs. They partner with academia and digital tech companies. They crowdsource R&D activity through competitions and prizes. They cocreate offerings with their customers, and they establish corporate venture capital funds and incubators to gain access to the ideas and capabilities associated with startups. Best practices are emerging: for the strategies, their implementation, and the organizational structures that support them.
BCG’s list of successful innovation strategies is based on our work with chemical companies and on industry interviews conducted in 2021 and 2022. At first glance, these may seem like familiar approaches, but they incorporate significant shifts in R&D management. They are resilient and oriented toward excellence in execution. Most important, they are collaborative in nature. Tailored to generating the most value from external relationships, these approaches are aimed at accessing capabilities from other enterprises.
The five strategies that follow include examples of best practices and represent good starting points that any company can adapt to its own culture and context.
Exhibit 2 presents these methods and strategies, along with other actions that can help build the necessary capabilities and business infrastructure over time. All of these are being deployed by leading chemical companies to involve external entities in the innovation process and to capture the highest value from those engagements. Together, these methods can help a company raise its level of innovation readiness. (Innovation readiness is the capability of realizing value from R&D investment.) There may be less emphasis on traditional innovation tools, such as R&D projects based only in in-house laboratories.
As a chemical company moves into more collaborative types of R&D, the role of the corporate innovation function must change with it. In more and more companies, large parts of R&D activities related to process and product are performed by the business, thus ensuring the closest possible link to customer requirements.
The role of corporate innovation becomes one of facilitation, with a concurrent, remaining focus on such critical areas as high-performance analytics and computing or platform technologies. These are areas with cross-business relevance where deep expertise is needed. In its role as the central innovation hub, this corporate function will need to facilitate agile management, reduce barriers to collaboration, and develop the necessary skills and digital platforms while maintaining a customer-centric focus. Companies that fully engage in such innovative strategies will lead the industry during the next few years and probably beyond.
Accordingly, these new practices may require a change in the culture of the enterprise. Simplify some of the more elaborate R&D processes of the past, especially if they involved multiple layers of approval before a product could be released—or waterfall-style systems in which different teams took charge of the new offering at different stages of development. Instead, adopt a minimum-viable-product approach. Release new offerings in the beta stage, test them in the field, and then revise them as needed.
The new approaches also require better working relationships with external partners, even long-standing suppliers or customers. You will have to provide guidance, maintain standards for quality and collaboration, and develop a framework for multidisciplinary innovation. As budgets are dedicated to crowdsourcing platforms, shared innovation centers, venture funds or joint ventures, and other projects may lose funding. Therefore, existing staff must fully understand the benefits to be gained. As shown in Exhibit 3, the shifting market environment will provide a rationale and sense of urgency for making the needed changes.
Developing a highly capable innovation function will enable you to coordinate activities far more effectively in real time. It will also lay the groundwork for future innovation. With the advent of quantum computing, theoretical research and analysis may take a major leap forward during the next few years. This could have profound implications for materials and biochemistry. Having a central innovation function, well-versed in how to collaborate with outsiders, will give companies a head start in participating in this research and help apply and deploy the resulting breakthroughs.
The corporate innovation function is typically responsible for coordinating all innovation activity. Coordination alone, however, will not be enough to lead the change effort across the company. Start by establishing your goal of enabling your company to innovate successfully in a highly collaborative environment. Then pursue the following steps:
You will know when you have made sufficient progress because your revenues will shift to services and tailored products. The structure of the innovation function will also change. And you may have a new appetite for anticipating future trends. The current momentum is undeniable. Your strategy now, and especially the way you marshal your innovation resources and the integration of external capabilities, will determine much of your company’s performance over the next ten years.