Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry

Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry is a concise text aimed at chemists, other natural scientists, and engineers who want to develop essential management skills. Written in an accessible style with the needs of managers in mind, this book provides an introduction to essential management theory, models, and practical tools relevant to the chemical industry and associated branches such as pharmaceuticals and consumer goods. Drawing on first-hand management experience and in-depth research projects, the authors of this book outline the key topics to build and sustain businesses in the chemical industry. The book addresses important topics such as strategy and new business development, describes global trends that shape chemical companies, and looks at recent issues such as business model innovation.

Features of this practitioner-oriented book include:

• Eight chapters covering all the management topics relevant to chemists, other natural scientists and engineers.
• Chapters co-authored by experienced practitioners from companies such as Altana, A.T. Kearney, and Evonik Industries.
• Featured examples and cases from the chemical industry and associated branches throughout chapters to illustrate the practical relevance of the topics covered.
• Contemporary issues such as business model design, customer and supplier integration, and business co-operation.

• Language: English
• Publisher: Wiley
• Release date: Mar 7, 2018
• ISBN: 9781118858509

Book preview

Preface

Marketing‐, R&D‐, and production‐related activities need to be orchestrated with the architecture of a firm’s business model to build, grow, and sustain a chemical company in today’s competitive environment. This orchestration inevitably requires that chemists, chemical engineers, and other R&D experts acquire business skills from the fields of strategy and innovation to jointly create value with marketers, business developers, and executives with backgrounds in business administration. Consequently, there is a growing demand in the chemical industry for trained specialists who not only have a solid chemical knowledge but also a good understanding of the underlying management processes. What is needed are experts in both chemistry and business – business chemists.

Business Chemistry is a practitioner‐oriented book that grew from this demand. It takes the characteristics of the chemical industry (e.g., research intensity, business‐to‐business relationships) into consideration while introducing experts with backgrounds in science and engineering to the most relevant and latest managerial topics for the chemical industry and related sectors, such as biotechnology, consumer products, and pharmaceuticals. The book is structured into two parts. The first part deals with key topics from the field of strategy, such as industry‐specific challenges impacting strategy formulation and execution, as well as analytical methods and concepts of strategic analysis applied by chemical companies. The second part covers key topics from the field of innovation, such as concepts and tools for new product and new business development in the chemical industry as well as collaborative activities with customers and suppliers. All chapters within these two parts of the book are written by experienced practitioners from companies such as ALTANA, A.T. Kearney, and Evonik Industries, and leading academics from the field of business chemistry.

We would not have been able to edit this book without the support from several individuals. Firstly, we would like to thank all co‐authors for their valuable contributions and great commitment to offering insights into the chemical industry. Secondly, Birte Golembiewski, Gerrit Knispel, and Nicole vom Stein are thanked for their feedback and for facilitating the editing process. We also thank Walter W. Zywottek for a vital discussion about various topics covered in the book. Of all the great contributors behind the scenes, we finally wish to thank our publisher Wiley, especially Shagun Chaudhary, our project editor, Sarah Higginbotham, our lead manuscript editor, and Rebecca Ralf, Managing Editor Life Sciences Books. Without their support, this book would not have been possible.

We hope that this book will be informative, useful, and enjoyable for you, and that it will enable you to build and sustain thriving businesses in one of the most exciting and versatile industries of all.

Jens Leker, Carsten Gelhard, and Stephan von Delft

Münster, Enschede and Glasgow 2018

Part I

Strategy

1 Management Challenges in the Chemical and Pharmaceutical Industry

by Jens Leker and Hannes Utikal

2 Principles of Strategy: How to Develop Strategy

by Jens Leker and Tobias Lewe

3 Strategic Analysis: Understanding the Strategic Environment of the Firm

by Jens Leker and Manuel Bauer

4 Management of Business Cooperation

by Theresia Theurl and Eric Meyer

1

Management Challenges in the Chemical and Pharmaceutical Industry

Jens Leker1 and Hannes Utikal2

1 University of Münster, Department of Chemistry and Pharmacy

2 Provadis School of International Management and Technology AG

For time and the world do not stand still. Change is the law of life. And those who look only to the past or the present are certain to miss the future.

John F. Kennedy (1917–1963), 35th President of the United States of America

The first chapter of this book outlines the specific characteristics of the chemical and pharmaceutical industry regarding, for example, products, site locations, competition, and research efforts. Additionally, the chapter summarizes results of a survey in the German chemical and pharmaceutical industry on business transformation processes and drivers of change that affect the industry. From these findings, management challenges and solutions to these problems will be derived.

1.1 Introducing the Chemical Industry as a Source of Innovation and Prosperity

The chemical industry is one of the major global industries affecting all parts of human life. Advances in chemicals and pharmaceuticals have contributed to improving living conditions and particularly nutrition and health levels worldwide. Enhancements in the field of automobiles as well as new developments concerning battery electric or fuel cell vehicles have resulted, not least because of new materials and new formulations originating from the chemical industry. New electronic devices such as smartphones have only been possible due to a change of pace in the development of electronic materials and an increase in their purity. Continuous research for and production of active pharmaceutical ingredients (APIs) are of central importance for fighting (new) diseases and improving therapeutic methods.

The chemical and pharmaceutical industry alters modern life through the transformation of scientific findings into marketable products. The invention and industrialization of production pathways such as the Haber(–Bosch) process for ammonia synthesis, the Fischer–Tropsch process to produce liquid hydrocarbons, or the contact process for producing sulfuric acid laid the foundations of the chemical industry. These processes acted as prerequisites for overall industry growth, technological change and wealth creation, whereby the underlying reaction pathways still apply today. Enormous advancements in technology in recent years have additionally enabled the sector to have an economically, ecologically, and socially positive impact on society in the future as well as today. In order to continue to achieve this goal, the chemical industry is reconsidering its modes of operation and finds itself in a phase of transformation [1].

From an economic perspective, the crucial role of the chemical industry for different customer value chains and the connection to nearly every end‐consumer market is reflected by the impressive size of world chemicals sales in 2013 of €3156 billion and the average global growth rate slightly above the global gross domestic product (GDP) [2]. It has to be considered that this overall development is mainly driven by high growth rates in the Asian–Pacific region, eventually compensating for lower growth rates in Western countries. Asia has already become the largest market for chemicals, with now more than 50% of the global market. This share is very likely to increase even more due to the growing population in Asia and the declining demand in the West, especially in Europe.

All these facets and volatilities make the chemical industry one of the most fascinating industries, not only from a scientific, technological or societal perspective, but also from a business point of view. In the following, we first characterize this highly interesting industry with regard to its specific characteristics and then subsequently highlight current managerial challenges relevant to the industry. In order to do so, we combine results from a literature review with findings from one of our own empirical studies on the management challenges in the chemical industry.

1.2 Characteristics of the Chemical and Pharmaceutical Industry

The chemical industry today is one of the largest industries in the world, with an impressive history (see, e.g., [1, 3]). This is reflected by the variety of products, processes, and market characteristics.

1.2.1 Product and Process Characteristics

The chemical industry is a process industry where firms add value to materials by mixing, separating, forming, or chemical reactions [4: 28]. Process industries differ from so‐called discrete industries with regard to the production process. In discrete industries, for example the automotive or engineering industry, production pathways converge as final products are assembled by using multiple discrete input components [5]. In contrast, a product in the chemical industry can simultaneously act as an intermediate, be processed further to synthesize other products, or serve as a finished, salable product. Production processes can therefore be convergent and divergent at the same time, resulting in an increased complexity for the planning and optimizing of such processes. In each process, components are mixed and react under well‐defined physical conditions. In order to obtain high reaction yields, chemical companies rely on experience and knowledge from different fields, especially chemistry and engineering, and in some cases biology and biotechnology. Hence, the special nature of the highly complex processes sets the framework for all managerial decisions in the chemical industry.

By adapting a value chain perspective, the chemical industry appears to convert organic and inorganic raw materials into value added products (see Figure 1.1). The upstream stages are closely linked to the petrochemical and exploration industry and are only manufacturing a few products, such as fertilizers or basic plastics originating from the Naphtha fraction of crude oil, and, in the case of inorganic materials, deriving from chlorine and salts. In the downstream steps, products of the upstream operations are further processed into a variety of products, which then enter various end markets. The customers of chemical companies are usually other firms who process the materials into end products, so that most relations are business‐to‐business (B2B) in nature.

Flow diagram of the chemical products in the industry value chain illustrating oil & gas, petro-chemicals, basic chemicals, polymers, specialties, and active ingredients.

Figure 1.1 Chemical products in the industry value chain

Within the chemicals value chain, the production processes vary. One can distinguish continuous, campaign, and batch production processes. Each process requires specific production assets, which tie up capital:

Continuous processes run on single‐purpose resources, steadily producing one product and not requiring regular changeover decisions. This type of process avoids downtime and scrap. However, flexibility in applying a different feedstock and input is limited as the production line is specialized for a certain product or process. Continuous processes can typically be found at the beginning of the chemicals value chain, involving petrochemicals, basis chemicals, and bulk polymers.

Campaign production is related to multi‐purpose assets, so that different processes and products can run on the same production resource.

Batch production is also related to multi‐purpose resources and, in addition, is suitable for steps implying a well‐defined start, throughput, and end production time as well as the ability to customize the huge amounts of the desired product. This is typically the case in the specialty chemicals segment [5].

There are different approaches to classify products of the chemical industry. Kline (1976) [6] distinguishes between commodities and specialty/fine chemicals. Following this categorization, commodities demonstrate a low degree of differentiation and a high production volume. They can be found in the early stages of the value chain and are manufactured by means of continuous production processes. These standard, high‐volume products with few variants are typically characterized by a low unit value and a low unit margin. Thus, the main buying criterion is the price. On the contrary, the specialty segments show a high degree of differentiation and a small production volume. Specialty chemicals are typically located at later stages in the value chain and are produced in batches. These products are often available in many variations and generate fairly high unit values and margins. Customers buy specialty chemicals due to their specific and unique product properties.

The different segments of the chemical sector can furthermore be described by looking at the relative importance of additional key success factors, such as the intensity and contribution of research and development (R&D) to success, the relevance of distinctive knowledge about specific markets and customer insights, and the importance of highly qualified personnel for the success of a business. These aspects are particularly decisive for the pharmaceutical and specialty chemicals segment, whereas the extent of investment in production facilities, the energy intensity of manufacturing, and an immediate access to raw materials significantly affect the success of commodity businesses.

1.2.2 Market Characteristics

The chemical industry has been growing since its emergence in the 1860s. By encompassing all parts of modern life and creating new materials or new active ingredients for pharmaceuticals, the chemical industry has always been a trigger for innovation in its customer industries. The chemical industry has a share of 3 to 4% of the global GDP. The main markets are the European Union, the United States, and Asia, with Japan and China as central markets. While the growth rates of chemical consumption in mature economies such as Germany and the United States are similar to the rates of the respective national GDP, emerging economies, especially China, are demonstrating significant growth.¹

Geographically, the chemical industry acts within at least three different markets. For a very limited number of products, companies produce the entire quantity of a product for the global market at one location. In this case, transportation costs must be negligible in view of the total cost position of a product and economies of scale. As a consequence, consolidation of the production in one plant is preferred over a global duplication of production activities. This is particularly valuable for producing APIs, where production processes typically have to be accredited. Nevertheless, regional production for the European, North American, and Asian markets is pursued for the majority of products. While there are limited trade flows between these main manufacturing regions, trading within the regions, for example within the European Union, is more intense. In addition to the global and regional markets, local markets can be identified, where products are only delivered around or even within one specific production facility. This can be observed in a so‐called Verbund production system, which is an integrated production where products are delivered directly, via pipes, to customers that are based on the same chemical park. Overall, the chemical industry occupies a multiregional role.

With its different segments, the chemical industry provides significant profit earning potential. In rankings comparing the profitability of different industries, the pharmaceutical industry is often found among the top industries with an EBIT (earnings before interest and taxes) of about 20%. Other profitable industries included within this class are petroleum, tobaccos, or consumer foods. The chemical industry (without pharmaceuticals) ranks in the middle of the list of 16 sectors [7]. Other industries with a much higher visibility in the business news, such as electronics, telecommunications, or aviation, have much lower results. In the following, we will discuss reasons for this favorable profit position.

First of all, companies active in the chemicals value chain provide value to their customers. Pharmaceutical firms produce highly differentiated products bought by price‐insensitive consumers and new products often benefit from their monopoly‐like position due to patent protection. The producers of specialty chemicals manufacture highly differentiated products as well, and can often charge high prices, as customers need these specific products and might even be able to generate a competitive advantage for their firm by buying them. On the other side, the price pressure is much higher for commodities where products are highly standardized, so that companies can only differentiate themselves from their competitors through product prices. However, it would be wrong to assume that only highly price‐differentiated companies can be profitable. In the chemical industry, those companies with an access to low‐cost raw materials, low‐cost energy or a highly effective interlinked production can realize above‐average profits in the field of commodities as well [8].

The intensity of competition, another main driver influencing industry profits, varies by segment and region. While the whole chemical industry is somewhat less consolidated than other industries, a higher degree of concentration can be observed at the segment level. This is, for instance, reflected by the top six manufacturers of crop protection products, who account for around 80% of this market [9]. In regional terms, the North American market shows the highest concentration, implying a rather oligopolistic market structure (with few players of similar size and power). Although Asian markets show lower degrees of concentration, profit‐destroying price wars can be impeded due to the strong growth [10]. In addition to the number of players active in the sector, risks for the profitability of the chemical industry stem from its capital intensity and high barriers to exit the market. For instance, in times of an economic downturn, firms are not able to reduce their production volume gradually due to process requirements, especially in the case of continuous production processes. The resulting overcapacities eventually lead to deteriorating prices and, in turn, to deteriorating profits. Moreover, exit barriers such as lay‐off protection and environmental regulations, which primarily apply to European production sites, constitute high exit barriers. High market entry barriers, notably the major investments in production plants, R&D, and marketing, have mostly prevented new companies from entering the chemical industry in the past. Consequently, the industry is characterized by a specific set of companies, where mergers and acquisitions occur frequently but new players are rare [3, 11, 12].

The evolution of the chemicals industry can be explained by means of its underlying basic sciences [13]. Business historian Alfred Chandler finds that the success of companies in the chemical and pharmaceutical industry results from transferring findings from basic research into marketable products and using the profits and experience gained from each new generation of products to commercialize the next generation [3]. Such companies have yet to be aware of a future where science and technology essential to the continuing growth of high‐technology companies might stop being the engine for innovation and growth. The chemical industry, with its periods of research‐based growth between the 1880s and 1920s and again during the 1940s and 1950s, has to cope with the fact that since the 1950s, only a few major new developments have been created by chemical sciences or engineering [1, 14]. Incremental product and process developments have thus gained more importance for successful companies in the chemical industry than basic research (which is rather aimed at radical inventions). Also, the successful model of pharmaceutical companies developing new products based on basic research findings (blockbuster products) has stumbled lately. However, in spite of this, in the 1960s and 1970s, biology, as well as the related disciplines of microbiology, enzymology, and the beginnings of molecular biology, contributed to the generation of new pharma products. Since the 1980s, advances in the field of biotechnology have fueled the development of innovative products from basic research findings.

To sum up, the chemical industry is actually a process industry encompassing thousands of products used in different applications and enabling innovations in their customers’ industries. The industry is capital intensive and consists of various segments, each having specific success factors and typically showing a multiregional character. The industry has a long tradition, with the initial industrial chemistry dating back to the 1860s in Great Britain. Applying insights from industry lifecycle theory [15], the industry can be classified to be in a maturity phase where the basic technological know‐how is well diffused and the focus is – except for patent‐heavy pharmaceuticals and some specialty chemicals – moreover set on technological improvements rather than on breakthrough innovations.

1.3 Business Transformation in the Chemical Industry

How can we then explain companies’ success in this industry? And how can companies prepare for future success? While the perspectives and methods differ, these core questions are of importance for management practitioners and scholars alike [16].

1.3.1 Business Transformation and Organizational Change Processes

Business historians have analyzed the successful companies in the chemical and pharmaceutical industries by (mainly) focusing on past events. As mentioned earlier, Chandler (2005) identified a company’s ability to create learning processes from one product generation to the next as being key to success. He found that companies with a focused strategy, limited in complexity in terms of different markets and products, are often more successful than firms pursuing strategies of unrelated diversification [3]. Another striking finding addresses the capability of successful companies to manage relationships within a value network. A chemicals firm’s position in industry networks, encompassing other chemical and pharmaceutical firms, and a supporting nexus of specialized suppliers of products and services, serves as a market entry barrier. While these networks were basically established for the chemical industry between the 1880s and 1920s, developments in biotechnology might open up a new field where positions for new as well as established players are not yet fixed.

In recent years, the questions of whether and how companies can proactively adapt to upcoming changes have gained a lot of attention. Approaches have touched various aspects at all levels within a company, from path‐dependent strategic behavior over continuous innovation cultures to the presence of (certain) dynamic capabilities that enable firms to adapt to changing environments. On the one hand, exogenous developments, such as globalization, demographics, and technological changes, have had a profound impact on the way companies do business. On the other hand, endogenous dynamics, such as product and process innovation or the re‐invention of business models, may also lead to large‐scale organizational change. Organizational change is defined as a shift in form, quality or state of an organizational entity over time [17]. Change processes can be observed for multiple entities (e.g., a whole industry) or for a single entity (e.g., a single company). One influential field analyzing change at the level of multiple entities is the so‐called population ecology school, stating that the ability of a single entity to change is very limited. This school proposes a Darwinian view, describing change processes as a result of variation, selection, and retention to be adequate in order to understand change processes (e.g., [18]). The opposite position is taken by the school of planned change. This model in turn views developments at the level of the individual organization as a result of an active organizational design process, where decision makers formulate goals, implement measures, and evaluate the impact on the defined goals (cf. [19] for the different models). In the following, we discuss organizational change from a single company perspective and base our reasoning on the assumption that companies have some discretionary power in actively designing change processes.

Organizational change processes can differ according to their intensity. Incremental changes encompass minor modifications of the status quo, whereas radical changes have a profound impact on different fields of an organization [20]. Transformation processes can additionally be distinguished in terms of the question of whether the organization anticipates an upcoming need to change or whether it reacts passively as a response to external influences [21]. Even though the term proactive transformation appears to have a positive connotation in the practice‐oriented management literature, proactive behavior might not be a successful concept per se. On the contrary, it is challenging for managers to balance the need for stability and exploitation of today’s resource base, on the one hand, with the prospects of exploring new paths, on the other.

Summing up, we use the term business transformation to describe processes of intended organizational change. We conceptualize managers as change agents who proactively or reactively try to develop and shape their fields of responsibility (company, business unit, or department) in order to achieve prior defined organizational objectives.

In a recent study, we analyzed the need for business transformation in the German chemical and pharmaceutical industry by means of a large‐scale online survey, conducted in 2014. In this survey, we addressed upcoming trends, potentially creating a need for transformation, and also asked participants about the relevant management activities to cope with these trends. In total, 270 people participated in the online survey: 141 managers possessing relevant experience in the industry completed the questionnaire; 34% of the respondents considered themselves as being experts in the segment of specialty chemicals, 16% in the field of polymers, 22% in pharmaceuticals, 10% in basis chemicals, 8% in agrochemicals, and 10% in other fields; 50% of the participants were top‐managers (board level), 20% were experts in R&D and innovation, 25% had other leading positions in chemical and pharmaceutical companies, and 5% held other positions. The sample covered different company sizes: 13% of the participants were affiliated with companies of up to 100 employees, 14% were in firms with 101–1000 employees, 21% were in companies with 1001–10 000 employees, 42% worked in large companies with 10 001–100 000 employees and 10% in companies with more than 100 000 employees.

In the following, we present findings from this survey. In doing so, we distinguish between successful and less successful companies based on participants’ self‐evaluation.² Following this distinction, 31% of the respondents classified their companies as being very successful, while 57% designated their companies as being on average successful, and 12% as not successful.

1.3.2 Drivers for Change

The future of the chemical industry, and particularly the impact of so‐called global megatrends, is actively debated in the literature [1, 22, 23]. Global megatrends are long‐term trends that may have a global reach lasting for more than 20 years and are defined as drivers of change that affect all parts of society, business, and politics. On the basis of these megatrends and their complex interplay, political institutions, industry associations, and companies create different scenarios for the future. Industry associations employ these pictures to communicate potential opportunities and risks for an industry to politicians, while companies utilize these scenarios to identify relevant fields for action, for example the need for cost cutting in one division and for investment in another [13].

There might also be a critical side to taking megatrends as a starting point for industry scenarios. Megatrends are often vague, for example the megatrend of urbanization. Information about how many people are moving from rural communities is just given in a span. The selection of relevant trends is always subjective and their interaction does additionally hinder the determination of precise scenarios. On the other hand, taking the trends into account may increase companies’ understanding of forces influencing their market and technological environment as well as their current business model. In our study, we focused on megatrends since they are one of the prevailing topics in the chemical management literature in the 2010s. Megatrends may thus serve as a common frame of reference when analyzing the necessity of transforming business in the chemical industry.

There are different ways to group relevant trends for the chemical and pharmaceutical industry [22, 24, 25]. For our study, we distinguished between 12 trends and asked the participants to rate their importance for their business activities in the years 2014 and 2024 (Figure 1.2).

The chemical industry in year 2014 and 2024 depicting horizontal bars for demographic change, globalization, innovation & technology, energy & resources, new consumption patterns, and business world in Europe.

Figure 1.2 Importance of different trends for the chemical industry in the years 2014 and 2024

Across all segments, the most important trends for the chemical industry in 2014 are the ongoing globalization, including the increasing importance of the Asian market, the need for interdisciplinary innovation, for example in the field of bio‐ or nanotechnology, and the growing significance of a higher employee qualification. The German chemical industry is thus becoming more international, opening up to adjacent scientific disciplines, and assigning significant importance to a highly skilled workforce in order to attain its goals. It is striking that for the year 2014, so‐called green issues, for example sustainable products, the shift to alternative energy sources, and the use of renewable resources, are considered to have the least relevance of all potential megatrends. At the same time, participants assume that these aspects will increase in significance until the year 2024. Successful companies – as defined earlier – attribute higher importance to these trends than less successful ones.

The variation in importance is also observable when comparing different industry segments:

For managers from the basic chemicals segment, the most relevant trends are the increasing significance of the Asian market, rising living standards in developing and emerging countries, and urbanization. They perceive cross‐industry and interdisciplinary innovations in addition to the shrinking and more diverse workforce in Europe to be of less relevance. The results reflect the aforementioned characterization of the basic chemicals segment as being highly automated, capital intensive, and based on established product and process know‐how.

Managers from the specialty chemicals segment also underline the meaning of Asian markets and the growing worldwide population. In contrast to the basic chemicals segment, special importance is attributed to interdisciplinary and cross‐industry innovations as well as a highly skilled workforce. This finding corresponds to the identified success factors for the specialty chemicals segment, which are, among others, the presence of customer and market knowledge, and a customer‐specific development of solutions.

The pharmaceuticals segment indicates the realization of interdisciplinary innovation as the most essential trend, followed by the opportunities that can be realized due to an ageing population in industrialized countries and growing Asian markets. Highly skilled workers are thus significant. Again, the empirical findings support our description of key success factors for pharmaceutical companies, that is, high R&D intensity, availability of market and customer knowledge, and use of qualified personnel.

In summary, the identified megatrends and their impact are perceived differently by the respondents depending on their associated sub‐segment of the chemical industry. Nevertheless, the specific key megatrends are stated to remain important in the future. While this may hold true on an aggregated level, the question of whether and how a specific chemical company will have to transform its business activities has still to be examined – an aspect that has not yet been analyzed in other studies.

1.3.3 Fields of Business Transformation

In our study, the participants also evaluated to what degree their business unit or company would have to change in the light of the described trends (need for change) and to what degree the respective unit is already prepared for this upcoming change (degree of preparedness). They identified a medium need for change for all three segments. Regarding this aspect, a significant difference between the chemical and the pharmaceutical industry, on the one hand, and other industries such as electronics, newspaper or financial industries, on the other, can be observed. While the chemical industry actually shows an evolutionary change pattern, the other mentioned industries are characterized by a more radical or disruptive change. Thus, radical innovations might not be expected in the chemical industry in the future.

The degree of preparedness in the chemical industry corresponds to the required change when considering the means of the answers. Differences can however be identified across the relevant fields of change. The degree of preparedness coincides with the existing need in the areas strategy and business model and business processes, whereas a relevant discrepancy can be identified in the fields workforce qualification and company culture.

Dividing the sample by industry segments as shown in Figure 1.3 reveals additional insights. The field of basic chemicals seems to be very well prepared, thus facing a rather small need for change. In the field of specialty chemicals, participants indicate a higher need for change. They assume that expected shifts within the key field of cross‐industry and interdisciplinary innovation will imply changes in the workforce qualification and the company’s values.

Horizontal bar graph illustrating the total, basic chemicals, specialty chemicals, and pharmaceuticals, depicting the need for transformation (dark shade) and degree of preparedness (light shade).

Figure 1.3 Business transformation in the chemical industry

With regards to the pharmaceutical segment, the highest levels of required change encounter the lowest degree of preparedness. A great need for transformation is seen within the fields corporate culture, employee qualification, strategy/business model, and business processes. Compared with the other segments, the pharmaceuticals segment shows – with the exception of the topic strategy/business model – higher gaps, not only regarding so‐called soft issues of corporate culture and workforce qualification but also concerning specific business processes.

1.4 Managerial Challenges in the Chemical Industry

After identifying major trends and fields of business transformation, the following section will present the findings from our study on current managerial challenges and elaborate on how to cope with the upcoming changes in the chemical industry.

1.4.1 Creating Strategic Learning Processes

Product life cycles in the chemical and pharmaceutical industry vary in terms of duration. For example, the product life cycle for chemical products that are used in electronic devices is often very short – lasting merely six months [26]. However, the majority of goods manufactured by chemical companies are characterized by having long product life cycles. Some of the commodities at the beginning of the industry’s value chain were invented more than 100 years ago and are still produced on the basis of the same chemical reaction (irrespective of optimizations in the production process over the years). Commodity production is capital‐intensive and ties up product‐, market‐ or even customer‐specific resources. Therefore, it is necessary to leverage economies of scales in order to achieve a cost advantage. Over the years, chemical companies have developed core competencies in optimizing established processes and managing complex value chains. These core competencies can however cause rigidity [27]. Applying insights from path dependence theory, it could be argued that the development of a chemical company is to a high degree determined by past decisions and investments. Companies may thus stick to their well‐established business activities and could be resistant to change. As a consequence, such a high continuity of relevant product, process, and market know‐how may prevent companies from looking outside the company, identifying future trends, and accepting the need for transformation [28, 29]. At the same time, routines and subsequent capabilities have been found to be developed in path‐dependent learning mechanisms.

Strategic learning capability is defined as a company’s ability to derive knowledge from past strategic actions and to use this knowledge to adjust strategy [29, 30]. As illustrated in Figure 1.4, we asked participants in our study to assess the strategic learning capability of their company or business unit (according to the measure used in [30]).

Horizontal bar graph illustrating the strategic learning capability of the successful vs. less successful companies depicting the total, less successful, average, and very successful.

Figure 1.4 Strategic learning capability: successful versus less successful companies

It turns out that successful companies stand out due to their strong strategic learning capability. More precisely, they are superior at assessing failures in strategic approaches and recognizing alternative strategies. Hence, these firms learn from their mistakes and are more flexible in adapting their current strategy and business practices. These firms significantly surpass other companies that are, according to their self‐assessment, not as successful.

Strategic learning capability is crucial for chemical companies in light of the discussed megatrends. It is, for instance, a perquisite for adopting influences from bio‐ or nanotechnology and, accordingly, redirecting firms’ research and/or production efforts. In addition, it enables companies to reconsider whether traditional success parameters on which their business model is assessed still apply. Recognizing non‐sustainable pathways and quickly adjusting strategies is facilitated when companies have such a capability – only then can a company take advantage of innovation and growth opportunities.

1.4.2 Managing Value Chains Across the Globe

A growth of 4.5% per year up to 2030 is predicted for the global chemical industry [22]. The extent of growth will presumably vary by region and industry sector. A modest increase with a growth rate of 1.8% p.a. (per annum) is forecasted for mature chemical markets such as Germany, while Asian markets are expected to grow above average. The rising demand in Asia is explained by the increased prosperity in the region, resulting in a greater number of people buying chemical‐intensive products. While the current share of Asian countries in the worldwide chemical production accounts for 40%, forecasts believe it will accumulate to 55% in 2030. By taking a company perspective, the key questions are how to participate in this growth and how to organize the value chain accordingly. In particular, companies have to decide about the geographic location of their value chain activities and about the way they handle interfaces across their globally dispersed activities.

Our study thus included a question asking companies about the geographic center of their business activities. Across all business functions and business segments, respondents answered that the relative importance of Europe as a location will decrease as Asia’s importance will increase. For 15% of the companies, their current geographical production focus is located in Asia. This share is estimated to rise to 44% in the year 2024. Participants assume that they will additionally shift their marketing and sales activities to Asia: this number rises from 11% for 2014 to 41% for 2024. A shift is also expected for R&D activities. While 89% of the respondents indicated that the geographical focus of R&D activities in 2014 is in Europe and less than 1% in Asia, they believe this proportion to change in the next ten years to 77% for Europe and 15% for Asia.

Creating additional capacities for downstream processes (e.g., production and marketing and sales) close to or in growing markets can be explained with the help of location science research. Location science identifies factors influencing companies’ international location decisions (for an overview cf. [31]). Scholars distinguish between sourcing‐oriented (e.g., raw materials availability, energy costs, labor supply, and skills), transformation‐oriented (e.g., climate), sales‐oriented (e.g., market potential), and government‐oriented (e.g., subsidies, trade barriers, business climate) aspects. For the commodity segments in particular, sourcing‐ and sales‐oriented factors are reasons for the decision to build up additional production and marketing and sales capacities in Asia. When raw materials are available on‐site, companies produce their products close to their customers and thus avoid high transportation costs. Companies need to interact with their customers closely, such as producers of specialty chemicals, and might move their sales and application engineering employees to the target markets as well. They thereby create rich communication channels [32] that might be more appropriate for discussing innovative topics.

The still existing advantages for conducting R&D in North America and Europe explain why respondents only observe a low tendency to move R&D activities to Asia. Beneficial attributes are the well‐established academic systems and a highly skilled workforce. An additional advantage is the presence of strong networks between chemical companies, their customers in lead markets such as the automotive industry, and specialized innovation partners in related industries such as machinery. For instance, many leading chemical producers in principal customer markets are still carrying out their research and production activities in Germany. The physical proximity and a comparable level of professionalism thus facilitate organizing cross‐industry and cross‐disciplinary collaborative projects. These agglomeration effects (e.g., in‐sourcing, transformation, and sales) described by location theory still favor R&D in Europe and North America. Though – according to business associations and managers in the chemical industry – the limited innovation climate and openness might be detrimental to allocating R&D activities to European countries. This is, for instance, reflected in the fields of green biotechnology and fracking, where R&D is concentrated in North America, due to the less favorable legislation and the business climate in Europe.

In summary, it could be expected that the multiregional character of the chemical industry, with manufacturing activities in the major markets of North America, Europe, and Asia, each of which mainly serve their regional markets with little trading between the regions, will probably prevail. Only for active ingredients in pharmaceuticals is a more global production pattern anticipated. Furthermore, it is important to consider the international interfaces of multinational companies where sourcing, production planning, product innovation activities, quality assurance, and marketing activities need to be coordinated across the globe [33, 34]. This additional complexity is difficult to cope with from a leadership and human resource management perspective even though it can be reduced by powerful IT systems.

1.4.3 Optimizing Processes

The chemical industry has reached a mature stage in its life cycle. This can be illustrated by the results from our study concerning the focus of organizational change during the last five years. Companies in the chemical industry create profits by putting significant emphasis