Chemical companies think about the drivers of success
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- Published date: March 2, 2021
- Qingdao, Naroli, Dadra and Nagar Haveli, India
Innovation clearly still pays off. Smart innovative portfolio design and better market insight can make it get better returns.
For a long time, innovation has been regarded as the cornerstone of the growth and profitability of chemical companies, and also a prerequisite for long-term performance. However, the commercialization of some products in the industry weakens the confidence of some companies and investors in innovation, and many people often fail to see a clear link between R & D expenditure and final return. This paper makes a new review of innovation data to show that although most chemical innovations continue to have stable returns, and the returns are much higher than the cost of capital, there are significant differences in the results of innovation projects. It also shows that a well-defined innovative portfolio strategy and improved market insight can alleviate many concerns about the returns held by companies and investors.
New cuts in innovation returns
As we all know, there is a high degree of variability in innovation performance, and enterprises have been trying to think about the driving factors of success. The drivers that have been considered involve strategy ("which big trend is right for us?"), Finance ("should we spend more money?"), organization ("how do we build our R & D?") and capabilities, including the degree of technology and market knowledge deployed by the company.
We believe that there are some particularly helpful insights when looking at the innovation performance associated with these capabilities. Recognizing this, we created a simple matrix to categorize innovation based on market familiarity and technology familiarity of listed companies at the time of product launch.
We use this framework to classify projects, considering the three main components of innovation performance of chemical companies: the time required for product commercialization, the success rate of Innovation Portfolio and the financial return of new products.
We collect information on chemical innovation from three main sources:
Marketing analysis of main chemical products. We have selected 35 chemical innovation products which are mature in the market, have considerable sales volume and are evaluated as profitable by manufacturers. We then interviewed more than 50 industry participants and looked at trade literature on these chemicals to determine when they were commercialized. No company specific data was used to develop this dataset.
Interview with R & D leaders. In cooperation with the Council for chemical research, we interviewed 20 R & D leaders from 10 major chemical companies in the United States to learn about their experience in investment and innovation. These companies cover a wide range of commodities and professional products, and are at the forefront of industry innovation. We discussed with these individuals three aspects of innovation investment: time to market, the expectation of internal rate of return (IRR), 1 and the failure rate of chemical innovation projects.
Meta analysis of the innovation performance database of chemical companies we developed. We analyzed the data of 118 business units of chemical companies with annual sales of more than $2 billion to determine the internal rate of return of their innovation projects. (see sidebar "our approach" for more information. )
While we recognize the inevitable limitations of the methods and methods used here, we believe that they provide a reasonably accurate and broad understanding of the prospects and rewards of chemical innovation.
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