Initial situation: Breaking new ground

Sustainability is the single most important challenge for the Chemical industry. Almost all players have launched respective programs focused on reduction of their own carbon footprint, on setting up circular value chains, on using more natural raw materials etc. This development was initiated both by increasingly stricter regulation and by changing customer and consumer requirements. The Corona pandemic has reinforced this global trend – resulting in an even stronger focus on health, regional and natural supplies. Sustainability might still come along with a huge transformation of the industry, but sustainable Chemicals open huge new market opportunities at the same time and pave the way to future growth. However, on the road to the promised land some major challenges have to be managed. 

Challenge: The innovator's dilemma

Sustainability puts the overall business model of the Chemical industry at risk:

• Core products like plastics, specific crop protection products and others are facing growing rejection which might, at least in some cases, end in bans

• Other core products like Additives are under observation as they may impede a better recycling of consumer products or are selectively suspected to negatively impact health

• The requirements to use more natural raw materials requires significant investments in innovation and will result in a partial reset of established value chains

• Setting up circular value chains requires open discussions about product ingredients and recipes jeopardizing the Chemical industry`s IP

• Customer requirements becoming more and more specific resulting in a broader and more heterogeneous product portfolio combined with smaller lot sizes and higher complexity

• Without supply of enough green energy CO2 reduction remains a major challenge for an industry still consuming huge amounts of energy

• …

As a result, the industry has to reinvent itself: New, natural or recycled raw materials, new production processes and new value chains, new services, new types of innovation, new business models, …

This reset requires major investments which have to be made “while the wheel is turning” – meaning while the core business model has to be maintained until the new business generates sufficient sales and profits. The Chemical industry is facing the “innovator`s dilemma” that every established industry has to manage while moving forward to a new technology.

As the development of the new business is expensive, risky and not promising significant profits in years, it remains rational behavior to continue investing into the “old” business. This might result both in a significant diversion and dilution of efforts leading to insufficient investment levels to break ground towards the new businesses.

This is why historically many industries failed to manage the step towards the new technology: The companies that built horse-drawn carriages were not those that built cars, those companies that built sailing ships were not those that built steamships. You might go on with this list forever.

Currently, the switch from carbon-driven engines towards electric motors in the Automotive industry is the next major field trial. Many established car producers struggle severely with this technology change due to the innovator`s dilemma. Ongoing consolidations and other developments indicate that not all of them will survive.

To overcome the innovator`s dilemma the Chemical industry might learn from history.

Way forward: Lessons learnt from the Automotive industry

1. Be quick and decisive

To be the first in a new technology always generates first mover advantages which will typically benefit in future sales and profits. Very often lengthy discussions do not result in better decisions. To be decisive could become a competitive advantage. Tesla decided early to invest into electric mobility. Today they are market leader in this segment.

2. Be entrepreneurial and courageous

To identify the right area for future investments is always difficult. However, looking forward innovation in Chemicals should no longer be focused on products only. The whole company including business models, processes, products, methods, new tools and digital solutions should compose the playing field. The management has to convince the organization to break new grounds. When BMW decided to invest into the i3 this was a visionary and entrepreneurial decision years ahead of the other players. At that time they still had the chance to catch up the technological advantage of Tesla.

3. Be persistent and enduring

Many investments into new technologies, products etc. go along with setbacks and high cost. Don`t give up too early. When BMW decided to stop the i3 program due to the limited success they lost their leading know how on electric vehicles and disposed the market to Tesla. The innovator`s dilemma slammed with full power. Today they are one amongst many others and lost their competitive advantage.

4. Become the “Chemical Tesla”

There are three major differences between the Automotive and the Chemicals industry. In the Automotive industry the disruption was driven by a technology push. Once the products were attractive enough the demand occurred step by step. In other words, Tesla made the market. In the Chemicals industry the disruption is driven by customer requirements – a technology pull effect. That means the demand is already in place. It just has to be satisfied with respective products. However, the major difference is that as for now, there is no “Chemical Tesla” around. This is your chance! The game is open and your company could become the technology leader in the new sustainable world – if you act quick, entrepreneurial and are persistent.

Every journey starts with the definition of the target. To fix the right strategic targets today is prerequisite for your success tomorrow. Santiago as established strategy advisor with a long track record in the Chemical industry provides the required know-how to support you in this crucial discussion process.