5.1.1 Temporality

The temporal dimension refers to the relationship between innovation and time. Firstly, innovation is not a one‐off event. From that day in 1878 when Constantin Fahlberg invented saccharin in his laboratory, it took several years for him to develop, step‐by‐step, a profitable business. After his fundamental research on sulfobenzoic acids, he went on to focus more on applied research when developing an efficient manufacturing process. He also had to uncover the correct formulation for the saccharin, manage its production, plan distribution channels, advertise, handle customer requests, and, eventually, adapt and upgrade its saccharin product for new applications. Here, it is crucial to emphasize that innovation is not only an outcome, but principally a process. To this extent, consider that, “while innovation is defined as the (commercial) introduction of a new idea, the process of innovation refers to the temporal sequence of events that occur as people […] develop and implement their innovation ideas within an institutional context” [6: 32]. This process view also implies that innovations go through several steps from invention to commercialization. Despite the many approaches to the innovation process, these steps commonly include idea generation and screening, technological research, business and market opportunity analysis, technical development, testing, and launch [7]. We will return to the issue of managing the innovation process in Section 5.4, where we present what is probably the most widely applied innovation process framework: the Stage‐Gate^® model.

Secondly, innovation is perishable. An innovation doesn’t retain its status indefinitely. Even saccharin became a common consumer good in the United States after sugar prices skyrocketed during World War I. Besides, innovation in the field of artificial sweeteners didn’t stop with saccharin: aspartame, sucralose, and, more recently, neotame (up to 40 times sweeter than saccharin) have been marketed since then [1]. Hence, from an overall perspective, innovation as a process is relentless, iterative work, which also includes inventing, developing, and introducing further improved innovations.

5.1.2 Content

The content dimension addresses the question: What is new? Theoretically, there is no limit to what you can innovate, as long as it leads to a useful economic application, namely, to its adoption by a group of customers. Research has produced an impressive amount of systematic typologies to organize this diversity and it is far beyond the scope of this chapter to cover them all.¹ This chapter will focus on the most common forms of innovations in the chemical industry: technological innovations, in particular products² and processes. Technological innovations refer to those innovations originating from different scientific focus areas, such as engineering, applied and/or pure natural sciences [9]. While it seems obvious that most of innovations in the field of chemistry rely on the contribution of natural sciences, the distinction between (i) product and (ii) process innovation (not to be confused with the innovation process) deserves more attention.

A useful representation of a product is that of a bundle of attributes, where these attributes fulfill customers’ needs and constitute technical specifications. Namely, a product is composed of two interdependent dimensions: technology and market, whereby the former offers a solution to satisfy the needs of the latter. Hence, product innovations aim at satisfying new needs, or the fulfillment of existing needs, in a completely new fashion.

By contrast, “a production process is the system of process equipment, work force, task specifications, material inputs, work and information flows, etc. that are employed to produce a product or service” [10: 641]. Process innovations consist of new combinations of factors aimed at improving efficiency. The distinction between product and process innovations is all the more important since, at an industry level, their development follows a systematic pattern of evolution; see for example Box 5.1.

5.1.3 Subjectivity

The subjective dimension of innovation relates to the question: From whose perspective is it new? As mentioned earlier, innovation is a relative concept. Therefore, in order to characterize innovation, taking into account by whom the novelty is perceived is just as important as what is new, because different players may evaluate novelty with different criteria. In particular, we distinguish here between: (i) the perspective of the firm within which innovations develop, (ii) the customer perspective, (iii) the viewpoint of the industry, and (iv) that of the firm’s executives. Box 5.2 provides an example of different perceptions of innovation.

Firms tend to assess innovations on the basis of competitor offerings, or by the extent to which new competencies or resources had to be used. Customers are inclined to call on their current mental models and behavioral habits [3]. Failure to consider this difference may lead to dramatic consequences. The firm’s perspective is appropriate to deal with management issues, such as the organization of the development of new products. As Garcia and Calantone (2002) [9] comment, using the customer’s perspective to address how a firm should approach the development of new products would be like “letting the customer drive the innovative process of the firm.” Conversely, the customer perspective is better suited to treating marketing aspects, like defining actions to promote the adoption and diffusion of innovations. Innovation history offers countless cases of failed new products caused by ill‐defined marketing strategies, which relied solely on the perspective of the manufacturing firms.

The third perspective, the industry perspective, is equally important because it implies, again, a specific set of criteria against which innovations can be appraised. From the viewpoint of an industry, the relevant factors to evaluate innovations exceed the resources, competencies, or strategy of a single firm; the industry perspective includes those of a group of firms engaged in a similar economic activity, like their competitors. This point is particularly critical for evaluating the degree of novelty of innovations.

Finally, the perception of executives has a somewhat special role when it comes to characterizing innovations. Within firms, executives have the decision‐making power to start or stop innovative activities, they devise the innovation strategy, prioritize goals, and allocate the necessary resources. In short, whether an idea or an invention may have the chance of turning into an innovation largely depends on the interpretation of executives [5]. Practical consequences are twofold: (i) a potential innovation only becomes realized once it has been recognized as such by the management team; (ii) the individual/team supporting an innovative idea or an invention has to demonstrate to executives why this idea/invention deserves such a recognition. Firms are social entities in which decision‐making often relates to power games and politics.

5.1.4 Intensity

The intensity dimension concerns the degree of novelty of innovations, that is, the extent to which the company is familiar with the new product/process. It is usually referred to as innovativeness, or, more specifically, as product innovativeness when referring to new products or processes. Being able to precisely answer the question “How much is it new?” is maybe the most decisive competence to develop in order to take the right decisions when managing innovations. However, if there is a common thread among the multitude of contributions addressing this issue, it is the remarkable inconsistency in the terminology employed to characterize product innovativeness. The terms “incremental” and “radical” innovations have established themselves in the managerial discourse, but you may also encounter many others, such as “imitative,” “breakthrough,” “disruptive,” or “revolutionary” innovations. Thus, to cut across this unnecessary complexity, while acknowledging the diversity of innovation types along the incremental–radical continuum, we will retain three categories, namely, in increasing order of innovativeness: incremental, really new, and radical innovations. This categorization refers to the typology of Garcia and Calantone (2002) [9], whose definition of product innovativeness is probably one of the most predominant in the recent innovation literature. Building upon their work, we suggest a simple but systematic heuristic to appraise product innovativeness. Before that, we present their definition of product innovativeness and the characteristics of the three associated innovation categories.

In essence, product innovativeness is a measure of the potential discontinuity an innovation can generate with regard to the technological and marketing components of a product/process. We consider two levels at which these discontinuities can take place: a macro level – the industry – and a micro level – the firm. This distinction is important as it clarifies from whose perspective and to whom a product/process is new. Innovations that are new from the perspective of the industry cause discontinuities on factors that are exogenous to the firm, which obviously requires a lot more innovative power than those merely new to the firm.

On that basis, incremental innovations are innovations that have the potential to cause market and technological discontinuities, but only at the level of the firm. Really new innovations correspond to the moderately innovative type. They generate either a market or a technological discontinuity on an industry‐level, but not both, in combination with any firm‐level discontinuity. Radical innovations result in market and technological discontinuities on both an industry and a firm level. Figure 5.2 provides a convenient matrix representation along with examples from the chemical industry.

Based on the definition given previously, there are more mathematically possible combinations than the eight represented here. However, several combinations are simply impossible as a discontinuity at the industry level systematically implies a discontinuity at the firm level – a firm being a subset of the industry. The distribution of innovations across types suggested by the matrix – 37.5% of incremental innovations, 50% of really new innovations, and 12.5% of radical innovations – is consistent with statistical breakdowns reported by several empirical studies [9]. To complement the matrix representation, Figure 5.3 shows a simplified heuristic to allow rapid identification as to which type an innovation belongs. For a given innovation, answering the following questions sequentially leads to the relevant degree of innovativeness.

1. Does the innovation have the capacity to create a paradigm shift in an industry?
2. Does this paradigm shift have the capacity to affect both science and technology and market structure?
3. Does the innovation solely have the capacity to affect the firm’s existing marketing and/or technological resources, skills, knowledge, capabilities, or strategy?

You may use this heuristic retrospectively to evaluate the innovativeness of already marketed products or processes at the time they were launched, or prospectively to anticipate the challenges to come. The latter use is doubtless the most appropriate for managers since the management of radical innovations requires a different approach from that of incremental innovations.

When the targeted degree of innovativeness increases, the degree of familiarity with the market and/or the technology decreases. Consequently, developing radical innovative products and processes requires a significant learning effort, which translates into a high commitment of resources over an extended period. Risk increases and the probability of failure too. Data compiled in a survey by McKinsey and Company on a sample of 35 chemical innovations indicate success rates below 20% and an average time to profit of 14 years for new products involving a new technology launched on a new market [13].³

In addition, research has shown that the process followed by radical and really new innovations diverges markedly from the development of an incremental innovation. Among other things, the development of more innovative products seems less straightforward and tends to experience more feedback loops [14]. This may involve the complete redefinition of the product/process concept during the course of development [15].

5.1.5 Normativity

At the beginning of this chapter, we stressed that innovation is defined as the economic exploitation of an invention. In line with Edison’s words “sale is proof of utility, and utility is success,” whether the definition of innovation requires that it has turned into a success appears to be a legitimate interrogation. Thus, the normative dimension deals with the relationship between innovation and success. Is it necessary to demonstrate that an invention successfully improved a situation – whatever the point of view – in order to transform invention into an innovation? Here, we agree with Hauschildt and Salomo (2011) that this view is inappropriate to the management of innovation. “Management is future‐oriented”: making success a decisive criterion in the definition of innovation would contradict the bare reality experienced by innovation managers, who strive to achieve an anticipated concrete success [5]. Nevertheless, success remains an essential objective. That is why we will now examine how the decision of managers may influence innovation success and commercial performance.

A recent meta‐analysis drawing on 64 studies published between 1970 and 2006 provides an initial compelling result: innovation consistently fosters performance, whether at the product or at the business unit level [3]. Interestingly, this study also shows that innovations perceived as new by customers contribute more to performance than new‐to‐the‐firm innovations. Consequently, developing high performing products or processes requires focusing on the customer perspective rather than on the firm’s perspective.

This leads to a second critical insight: pursuing innovation for its own sake of incorporating new technologies into products is a sterile strategy. While product innovativeness improves product advantage against competitor offerings, it negatively affects the familiarity of customers with the new product/process. Therefore, ensuring innovation success requires education and familiarizing customers with the new product/process so as to demonstrate its superiority and reduce perceived uncertainty. “Unless the technology in a new product overcomes customer uncertainty and is perceived to provide an advantage over competitor offerings, it is unlikely to improve new product profitability” [16].

Thirdly, from the perspective of the innovating firm, technological innovativeness is also a double‐edged sword regarding commercial success. On the one side, technological innovativeness has the potential to improve product advantage, which, in turn, favors commercial success. On the other side, it generates changes within the firm and its environment (regulation, infrastructure, social norms, etc.), which reduces the likelihood of commercial success [17].

In a nutshell, the more innovative products and processes are the more they contribute to commercial performance, but indirectly. On the way to success, managers must acknowledge and address the four following challenges:

• demonstrate advantage over competitive offers
• tackle customer uncertainty with regard to novelty
• manage organizational changes ensuing from innovation
• address the need for transformations in the firm’s environment.

As this discussion on the nature of innovations shows, innovation is a complex, multi‐sided, and dynamic problem, whose raison d’être lies well beyond the mere fascination for science and technology. Innovation contributes directly to the economic performance of firms. Innovation underpins technological change and, as such, determines the ability of firms to adapt and survive in an ever‐changing environment. Keep in mind the tragic fate of Eastman Kodak, which has almost been wiped out of the photography industry after missing the shift from chemical‐based film technology to digital. Despite tremendous challenges, harnessing the complexity posed by innovations is not an option. It is a necessity.

5.2.1 Technology‐push Versus Demand‐pull

Several authors have been associated with one or the other side of the controversy between technology‐push and demand‐pull (see for example Box 5.3 in the context of the chemical industry).⁴ Yet, the conceptual underpinnings of this debate are frequently depicted as the opposition between the theories of two scholars: Schumpeter for the technology‐push tradition, and Schmookler for the market‐pull tradition [20]. The pattern suggested by Schumpeter’s theory of “creative destruction” can be summarized as follows:

1. Developments in science lead to the birth of major inventions promoted by individual inventors or the R&D activities of large firms.
2. Entrepreneurs (firms or individuals, sometimes the inventors themselves) sense the opportunity behind these inventions. As a result, they are willing to take the risk of developing, producing, and marketing the inventions, turning them into innovations.
3. As the innovation spreads, it disrupts existing market structures. The innovators benefit from a temporary monopoly position, which translates into exceptional growth and profit. Firms that cannot adapt go bankrupt.
4. Entry of secondary innovators progressively undermines this monopoly, while reproducing the initial conditions of equilibrium in the market.

Derived from a series of follow‐up empirical studies, the demand‐pull approach emerged. Advocates for this approach concluded as to the primacy of market‐related factors in determining innovation success and, thus, were perceived to contradict the technology‐push approach. Among tenants of the demand‐pull paradigm, the work of Schmookler is regarded as a major contribution [20]. His theoretical developments may lead to the following pattern being expected:

1. Market demand rises, driving firms to increase production and investment.
2. Rising demand is first satisfied using existing means, like existing plants.
3. Then, steady market pressure and the related technical challenges foster inventive activities, which translates into an increased rate of inventions, within and outside firms. Growth in the number of patents as well as corporate R&D activities reflect this trend.
4. Inventions are incorporated into new and improved products and processes so as to meet market demand.
5. Subsequent variations in demand are expected to generate a similar variation in the rate of invention after a certain time lag.

In this model, the role of science and technology is subordinate to the strength of demand; people (or firms) develop inventions in response to a market opportunity. The demand‐pull theory found a wide audience upon its introduction and “it became fashionable to assume that the debate was over and that it had ended in a clear victory on points, if not a knockout, for the demand school” [21: 207].

While acknowledging the complex feedback structures between market demand and technological developments, Dosi (1982) [24] suggested that the importance of the technology‐push and the demand‐pull model depends on the degree of innovativeness of the underlying technology. Thus, radical technological innovations, which he terms changes in technological paradigms, result mainly from technology‐push efforts, whereas incremental innovations within existing technological paradigms are essentially market‐pull.⁵ This is not to say that you should consider market signals any less when developing radically new products or processes; analyzing the market is still a major determinant of innovation success. Yet, merely reacting to customer demand will tend to produce more incremental innovations while investing in R&D, or establishing partnerships with universities to stay ahead of technological advances, is a necessary step, but not sufficient, in order to develop radical technological innovations.

In the previous discussion, we pointed out the limits of early debates on the origins and direction of innovations, and emphasized the role of interactions between market signals and technological developments in explaining their emergence. Cutting across the technology–market dichotomy, more recent views address the issue of categorizing the sources of innovations by taking a functional perspective. That is, they distinguish between sources depending on how they generate benefits from a given innovation. Drawing on this perspective, we can distinguish between the following:

• corporation (corporate R&D programs, culture)
• individuals/employees (“Google” culture)
• competitors (e.g., use of knowledge spillover, analysis of patents)
• process demands (e.g., improvement of manufacturing/logistic processes)
• government (e.g., e‐mobility)
• suppliers/customers.

In the chemical industry, a significant amount of innovative efforts originates from the manufacturers themselves. In a study, Von Hippel (1988) [26] found that over 90% of innovations in the field of engineering plastics (e.g., polycarbonate) and plastic additives (e.g., butyl benzyl phthalate) had been developed by polymer manufacturers. Even today, internal innovative activities remain a key source of new products and processes. Here, technological forecasting has proven to be very valuable in this endeavor.

Any forecast involves the evaluation of the probability and significance of possible alternative futures, and technological forecasts do just the same. However, let us clarify right at the outset the misunderstandings about the real purpose of this activity. The goal of technological forecasting is not to predict a precise event whereby, at a given date, a technology comes into existence for a certain application. Instead, technological forecasters produce “range forecasts” and “probability statements” so as to anticipate the future characteristics of technologies and their potential consequences. A useful forecast helps to identify opportunities and threats, supports decision‐making, and allows managers to act in order to improve the firm’s future positioning [27]. “Technological forecast is not a picture of what the future will bring; it is a prediction based on confidence that certain technical developments can occur within a specified time period with a given level of resource allocation” [28: 129]. Chemical companies sometimes go as far as institutionalizing this activity, as Evonik did with its corporate foresight team [29]. Several methods have been developed for technological forecasting. We will focus here on some of the most widespread techniques, namely: (i) environmental scanning, (ii) models, (iii) Delphi, and (iv) extrapolations [30].

5.3.1 The Innovation System

When considering the organization of internal innovations activities, it is essential to note that there cannot be anything such as a recipe about the ideal structure to manage innovations. Far more, organizing for innovation has less to do with control and regulation than with managing relationships between different entities: people, organizational units, and even machines. In this perspective, organizing means designing the “innovation system” of the firm, namely, taking actions in order to develop a coherent interplay among all stakeholders that are potentially involved in the firm’s innovation activities [5]. Compared with the organization of traditional routine tasks (e.g., production, accounting), it is crucial that the innovation system allows a high degree of self‐organization. Hence, new relationships between innovation players may emerge and stakeholders organize spontaneously. Such a perspective is more appropriate to the entrepreneurial nature of innovation than the sole process control approach. The different components of the innovation system are shown in Figure 5.4. We have left aside the management of single innovation projects as well as the issue of developing an innovation culture in order to focus on the institution of a specialized innovation function.

As soon as innovations gain in importance, firms start to organize an internal innovation function. Following the logic of the division of labor, they tend to transfer the responsibility of innovation activities to a specialized unit. In this manner, firms aim at capitalizing on the benefits of specialization, such as concentration of competences, or increase in skill level and work efficiency. The risk here is to concentrate all responsibilities on one person, for example, by dedicating a specific innovation position reporting directly to the board of directors or a business‐line head, who would then be in charge of steering every innovation project in a certain area. This approach is unlikely to succeed, because one person is unable to handle such a workload on his or her own. Moreover, such an innovation function would never be empowered to overcome the inevitable barriers encountered when innovating [35]. However, these remarks do not diminish the need for a clearly identified organizational unit that is in charge of innovation activities. O'Connor (2008) [36] even suggests that such an organizational structure is a key requirement for firms aiming at developing a “major innovation dynamic capability”; that is, a meta‐capability allowing them to develop really new and radical innovations.⁸

Besides, this need to specialize in multiple innovation projects does not contradict the idea of a holistic orientation of the firm towards innovation as prescribed in the concept of innovation system (see Figure 5.4). Indeed, the primary role of a dedicated entity responsible for the management of innovation is to align and coordinate innovative efforts towards the achievement of the firm’s objectives. While providing coherence and orientation to innovation activities, such an entity should allow innovation to take place outside its boundaries, that is, anywhere else in the firm, and even include external initiatives [5].

A final element to take into consideration is the central role of the project‐based organization in the management of single innovation processes [5]. Innovations are particular endeavors characterized by the unique conditions under which they take place: they unfold over a limited timeframe – even if it is not always possible to anticipate its exact duration – and fulfill a clearly defined purpose. Thus, projects are particularly suitable organizational forms to manage the development of single innovations. However, when firms seek to institutionalize innovation activities, they consider innovation as a permanent activity. This implies continuously pursuing new projects, sometimes even several in parallel. Therefore, the main responsibility of a central innovation unit should consist of managing the innovation project‐portfolio. According to Hauschildt and Salomo (2011) [5], this multi‐project management unit should have responsibility for the following tasks:

• selecting relevant projects and supporting the creation of new projects in line with the firm’s strategic goals
• allocating resources between selected projects
• collecting, processing, and distributing project‐relevant information
• promoting cooperation across units, functions, and hierarchical levels.

5.3.2 The Organization of R&D Departments

Contrary to innovation activities as a whole, research and development processes are far easier to institutionalize. The general relationship between research and development activities and innovation activities is depicted in Figure 5.5.

R&D is a systematic activity focusing on the creation of new knowledge, especially scientific and technological knowledge when considering the chemical industry. In the optimum case, the output of R&D consists of inventions, whereas the innovation process delivers a marketed product or process. Further, innovations are one‐off processes, in contrast to R&D, which involves many repeatable procedures. As a result, the delineation of R&D activities in terms of time and content is much clearer and can be better developed into a routine. It is then possible to reap the full benefit of specialization, which justifies the organization of R&D into specific departments. As for the real problem of organizing R&D activities, whether the organization of R&D results in a centralized or a decentralized structure is a central issue.

The question of centralization, in fact, involves two aspects: first, the extent to which R&D activities should be integrated in one location or distributed across different entities; second, at which organizational level should the responsibility for these activities rest. Thus, a centralized R&D organization is usually related to a unique structure reporting directly to the board. A decentralized R&D organization refers to several entities distributed among lower organizational levels. In between, there exists a multitude of possible hybrid structures. For instance, one option consists in centralizing all fundamental and applied research activities at a corporate level, while development work remains under the responsibility of the business units.

In order to guide decisions in favor of one or the other types of structure, Hauschildt (1997) [35] developed a decision model that is presented in Figure 5.6.

The following factors determine to what extent R&D should be organized as a centralized rather than a decentralized function:

1. Overall structure of the firm: The stronger the orientation towards structures relying on stand‐alone profit centers (i.e., towards a divisional structure), the higher the tendency towards decentralization. Obviously, firm size plays a significant role. Smaller firms have a more limited product and customer portfolio and tend to have a functional organization⁹ with a centralized R&D.
2. Number of core technologies: Firms pursuing R&D activities in multiple technological fields should favor decentralization. The precedent remark about firm size applies equally here since small firms are also likely to focus on one core technology, and thus favor a centralized R&D organization.
3. Targeted degree of innovativeness: When developing more radical innovations, a centralized R&D structure has many advantages. In terms of resources, for example, their concentration in one location allows both the high risk of failure and the important financial commitment associated with radical innovations to be coped with; also in terms of attention and visibility, as radical projects needs more management support to overcome barriers than incremental ones.
4. Timeframe: This factor considers the length of the R&D activities up to successful market introduction. The longer the expected timeframe, the stronger the recommendation to transfer R&D activities to a centralized unit.
5. Resource need: The larger the necessary “critical mass” with regards to qualified personnel, equipment, and financial resources, the stronger the tendency towards centralization.
6. Customer orientation: When research and development occurs in reaction to market demand or in cooperation with customers, decentralization is favored. A diversified customer portfolio with many different needs strengthens this tendency.
7. Need for a central service unit: It is more cost‐efficient to centralize administrative services, such as information services (patent monitoring, archives, documentation, etc.). This is in fact true for all types of services on which R&D employees systematically rely, but which do not belong to their core competences.

It is important to note that even if current trends in the chemical industry (e.g., shorter innovation cycles, increased cooperation with customers) seem to favor decentralized structures, a complete decentralization of R&D seldom occurs in practice. Hybrid structures consisting of both centralized and decentralized units are quite common, in particular in large chemical companies. In this regard, Bröring and Herzog (2008) [39] investigated the organization of innovation activities at Degussa (now Evonik Industries). They identified four types of a more or less centralized structure:

• Traditional R&D: Most R&D is carried out by R&D groups within operational business units. These activities focus on short times‐to‐market and draw on existing competences.
• Corporate‐funded projects: For slightly more innovative initiatives which are required to advance the technological knowledge of the business units but still with a short‐term commercialization goal; corporate funded projects present an alternative solution. These projects take place within the business units for two years with funds from both the business unit and a central corporate R&D entity.
• Project houses: The goal of these hybrid structures is to develop new technology platforms. It combines the competencies of employees from several business units that are working in a separated unit for around three years, outside existing structures. Like corporate‐funded projects, project houses are financed in equal proportion by the business units involved and corporate R&D. However, they report essentially to the central R&D unit.
• Science‐to‐business centers: These structures extend the concept of a project house to address emerging markets and technologies with a long‐term horizon. They are located at the central R&D facility and rely on corporate as well as public funding.

5.3.3 Closed and Open Innovation

Throughout the twentieth century, the logic underlying the organization of the innovation function in chemical firms, as in most industrial companies, has been almost exclusively internally oriented. Successful firms like Dupont or Edison’s General Electric have built their fortune using the same formula: they relied on large centralized R&D centers to generate ideas and develop new products, and then manufactured, sold, distributed, and serviced them, all by themselves. This approach is what Chesbrough (2006) [40] called the “Closed Innovation” approach. It assumes that successful innovation requires control. In this logic, the innovation process takes place strictly within the firm’s boundaries, using the firm’s own resources and competences to nurture innovations stepwise from idea to market. This model allows firms to capture the sales revenue from breakthrough discoveries and, thus, to perpetuate the cycle of R&D investments, innovations, profits. Consequently, attracting key scientists, protecting IP, and avoiding knowledge spillovers outside the firm are essential for preventing others from benefiting from these critical R&D assets. However, according to Chesbrough (2006) [41], this approach no longer works efficiently. A paradigm shift is at work, which redefines how industrial companies deal with knowledge and engage in innovation activities.

The new paradigm is called “Open Innovation.” It draws on the idea that firms should drive their innovation process so as to benefit equally from idea sources and commercial channels located outside the firm. Hence, those following the Open Innovation logic use both internally and externally developed ideas to sustain their flow of innovation activities. Conversely, they rely on internal and external market pathways to commercialize inventions. Open Innovation discards the old view that conceived of the firm’s outer limits as a guarded containment wall. Instead, corporate boundaries are now similar to a porous interface through which knowledge can freely flow. At any time during the innovation process, external ideas, technologies, and even ready‐to‐market concepts can integrate the firm’s activities. Similarly, at any stage of development, internally initiated projects may be licensed, divested or spun off to benefit from external commercialization channels and reach additional markets. In summary, Open Innovation is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively” [41]. Figure 5.7 provides an overview of some of the key assumptions underpinning the Closed and Open Innovation paradigms.

Even though the chemical industry had already been using some elements of Open Innovation – partnering with universities to identify or develop new molecules, for example – long before the concept gained importance among management scholars, you may still wonder: What makes the Closed Innovation logic obsolete? Why follow an Open Innovation approach? Beyond the promises of reduced development time and cost, Herzog and Leker (2010) [43] identified six reasons in the literature supporting the shift to an Open Innovation process:

• Research always becomes more resource‐intensive. Technology development steadily gains in complexity and single firms are less capable or willing to support the resulting risks alone.
• Outsourcing of R&D tasks is common practice. The market for innovative technology suppliers grows.
• Highly‐qualified workers are increasingly mobile. Simultaneously, higher education around the world expands and always brings more skilled personnel to the job market.
• The growing presence of innovation intermediaries (e.g., yet2.com, InnoCentive), acting as technology brokers between innovation partners, facilitates inter‐organizational exchanges.
• Venture capital is more readily accessible. Therefore, individual inventors are more inclined to establish their own start‐up instead of joining traditional R&D organizations.
• Industry convergence blurs the limits between previously unrelated areas. Converging value‐propositions, technologies, and markets creates new inter‐industry segments (e.g., nutraceuticals or functional foods) and forces firms to seek support from other industries [43]

As mentioned earlier, the Open Innovation concept relies on two fundamental principles. On the one side firms should use external sources to advance their innovation projects. On the other side they should consider external commercialization pathways as alternatives to their own market channels. Thus, the main Open Innovation activities include inbound, outbound, and coupled activities. Figure 5.8 gives a graphical representation of these different activities in the innovation process. Next we will present some examples for each type of activity.

Inbound, or inside‐in activities, relate to “the ability to gain and explore knowledge from external partners” [45: 1237]. Potential external sources are manifold and may involve users, suppliers, competitors, start‐ups, government agencies, universities, consultancy companies or research institutes. The range of activities is also broad, from the involvement of lead‐users to acquisitions, through to idea crowdsourcing and technology scouts. We will leave aside the classical R&D cooperation, which is widespread in the chemical industry, and focus on two more representative inbound activities:

• In‐licensing: A licensing contract is a legal arrangement allowing a firm to exploit another firm’s intellectual property for a certain period of time and under specific conditions. Thus, the licensor (seller) grants a license to a licensee (buyer) in exchange for payment of a fee, usually consisting of a one‐off upfront payment in addition to yearly royalties. License terms are basically open to negotiation and vary greatly. In the case of technologies, know‐how and prototypes may be transferred along with intellectual property. Typical licensing terms specify the applications and markets where the licensed intellectual property may be used, define commercialization milestones that the licensee must achieve to retain its right, and may grant to the licensee an exclusive right to improve the technology. For the chemical industry, licenses are particularly relevant for accelerating technology access [43].
• Corporate venture capital (CVC): This approach tries to secure minority equity stakes in innovative start‐ups that are not yet publicly traded, but are seeking capital to pursue their growth. To that end, established firms create dedicated venture capital units, which are assigned the task of identifying and investing in promising technology start‐ups within a given budget. A central advantage of CVC investments is their reversibility [43]. When dealing with emerging technologies, it is extremely difficult to anticipate whether it will turn mainstream or not. If the technology does not develop as expected, the minority stake can be easily sold. Hence, CVC allows a firm to learn about emerging technological fields while minimizing risks. Further, in the case where technological developments are successful, the investing firm has the opportunity to increase its investment and gain returns from commercialization.

Outbound, or outside‐in activities, refer to “activities involved in external exploitation of internal ideas, for example by licensing out, selling of knowledge, and divestment of parts of the firm, such as spinning off innovation projects into new create innovative firms” [45: 1237]. In the following, we address out‐licensing and spin‐offs in more detail:

• Out‐licensing: In most technology‐intensive industries like the chemical industry, patenting inventive research results is systematic. However, firms often develop and patent technologies that are never commercialized for a variety of reasons. Out‐licensing is an option to generate additional revenues from unused intellectual property. Herzog and Leker (2010) [43] mention that chemical firms may earn up to 10% of net operating income from out‐licensing activities. However, motivations to license out a technology should not be limited to disinvesting non‐core intellectual property or simply reaction to external requests; it may be also part of a broader marketing strategy aiming, for example, at establishing a technology as the industry standard.
• Spin‐offs: Contrary to the divestment of complete business units or business lines which actually obey general strategic considerations, technology spin‐offs are typically motivated by technological reasons [43]. When a technology does not fit into the firm’s portfolio because it does not relate to existing operations and has low strategic priority, the team developing that technology may not be able to access sufficient resources to proceed to commercialization. Similarly, expensive and risky emerging technologies may have a hard time finding support within the mainstream business. Thus, creating a legally independent structure to commercialize these types of research outcomes can prove a viable solution. The parent company may retain a minority or a majority share, depending on the strategic role of the venture.

Coupled activities combine inbound and outbound activities. They encompass “collaborative activities between different actors in the innovation,” including “co‐creation with complementary partners through alliances, cooperation, and joint ventures” [45: 1237]. In this way, firms collaborate in order to both develop and commercialize innovations. For instance, it can take the form of an R&D collaboration, resulting later in a joint commercialization of the outcomes. This is exactly what happened between Evonik Industries and KraussMaffei when they developed the CoverForm technology. Combining Evonik’s polyacrylate chemistry knowledge and KraussMaffei’s know‐how in designing injection molding processes, the two firms invented a new one‐step, scratch‐resistant coating technology. Marketed under a common brand, CoverForm, it consists of a special Plexiglas formulation supplied exclusively by Evonik in association with KraussMaffei’s equipment [46].

To conclude this overview of the Open Innovation approach, we wish to echo the view held by management researchers on the need to combine all three types of activities. This is all the more important since Open Innovation activities have been proven to significantly impact the performance of a firm, especially regarding innovativeness and financial performance [45].

5.4.1 Stage 1 “Ideas Management”

Within the “Ideas Management” stage, all product‐related ideas are collected on a global basis. Employees of the company are invited to bring up new ideas regarding new product development, new technologies, new applications, and new market opportunities. All incoming ideas are stored and handled in a database based on Microsoft SharePoint technology. The owner of the idea could either send the idea description via e‐mail to a central Ideas Management Office or dispatch the idea directly into the system. It is very important to note that the use of an extended form sheet has proven to be unsuccessful compared with sending the new idea via e‐mail. People do not typically have all the information available at this moment to fill out such form sheets. In practice, they will not dispatch the form sheet and the idea would be lost to the company. Instead of filling out form sheets, sending an e‐mail with the new product idea is well accepted and can be processed.

In a first step the incoming new idea is reviewed according to the following questions: Is it a new product idea? Is the idea clear and comprehensible? Are there existing ideas on the same subject already? If the idea is not clear, then the idea owner is asked to submit more detailed information. If similar ideas happen to already be in the market place, the newly submitted idea will be linked to the existing idea(s). Additionally, attributes will be attached to the new idea (e.g., country of origin, application areas, etc.) for further evaluations.

At Gate 1, all incoming ideas are evaluated by marketing as well as by research and development. It was decided to use the feedback from the lab managers rather than middle‐ or top‐management in order to ensure that the experience and practical knowledge from the experts is taken into account. The Ideas Management Platform on SharePoint covers not only the administration of the ideas, but it also includes a task management system. This combination is absolutely essential, to avoid only collecting information on new product ideas.

In addition to the platform the operation of a central Ideas Management Office has proven to be of great value. In order to promote ideas to the next stage, idea owners very often need support from an expert group. Conference calls and meetings are organized by the Ideas Management Office to discuss “face‐to‐face” the new ideas and to encourage the participants to initiate further actions.

At the end of this process a decision has to be made: to take no further actions or to start a pre‐project or a project. This decision is made basically on two criteria: market attractiveness and technology fit. The input comes from the marketing organization and from research and development. At this stage, a qualitative input is sufficient. New projects are not just initiated by single ideas. Similar inputs are often clustered according to their application area and give rise to unexpected new projects. The Ideas Management Office coordinates all activities and keeps records of the final decision in the Ideas Management Platform. To ensure a high acceptance within the innovation community, it is very important that all steps and decisions are transparent and visible, especially to the idea owner.

5.4.2 Stage 2 “Feasibility”

After having decided to progress with the new product idea the “Feasibility” stage is initiated. To this end, a formal request has to be sent to the Innovation Management Office, containing the following items: the target of the feasibility study, the timeframe, and the estimated budget expressed in man‐hours. In general, the time frame should not exceed a period of 6 months and the budget should be limited to 300 hours. A request coming from the marketing organization is reviewed by the corresponding Business Manager; in the case of a technology pre‐project, the project is reviewed by the Chief Technology Officer (CTO). The process is accompanied by a formal approval including a signature (a requirement for ISO (International Organization for Standardization) certification). After assigning a head for the pre‐project, the pre‐project head nominates several team members who are crucial for accomplishing the project goals. The pre‐project will be set‐up in the Project SharePoint Platform. All activities are coordinated by the Innovation Management Office.

Within the “Feasibility” stage, two main topics are central: firstly, lab experiments should exhibit the basic possibility of synthesizing new products with the desired properties; secondly, market opportunities should be detailed by analyzing the given market and contacting potential customers. All information is collected and documented in the Project SharePoint Platform. At this point, the chemistry of the new product is not yet decided; therefore, potential issues regarding regulatory compliance (REACH) are not addressed. The final target of this stage is to fill out the Project Application Form (“PAF”). The PAF consists of several chapters, including marketing, technical, and strategic criteria. In addition, environmental aspects have to be indicated (requirements for classification, emissions, use of renewable raw materials, etc.). Further, PAF covers all key characteristics of the project (budget, timeline, project team, risk attributes).

After accomplishing the PAF, the pre‐project head can apply for a presentation to the Steering Committee for New Product Development (Gate 2). This Committee meets every month and consists of the following members: Board of Management, Business Line Managers, Head of Marketing, Chief Technology Officer, and Head of Innovation Management. Since it is difficult to pre‐determine the exact timing and the budget, a target corridor for decision criteria is used by the committee to evaluate the projects.

Once the application for the new project has been presented and discussed, the committee makes a decision according to the following criteria: market attractiveness, technology fit, and strategic fit. The result can be a rejection, resubmission or approval. All types of decisions are explained to the presenter and documented in the Project SharePoint Platform. A formal set of documents have to be signed (requirement for ISO certification).

5.4.3 Stage 3 “Lab Development”

The “Lab Development” stage could be considered as the “heart” of the New Product Development. Within this phase the new substances and/or the new formulations are developed. The “PAF” describes all required product criteria in detail, which indicate the targets for the development of the new product and, thus, represent an important input for the scientist in the lab.

Based on experience, literature, and patents, scientists begin to synthesize the new product on a typical lab scale (approximately 100–200 g). At the beginning, they search for the right chemistry by selecting appropriate substances and formulate them in suitable solvent(s). These products are tested in the application laboratories according to characteristics and how appropriate they are. During all steps, it is crucial that scientists and technicians from the application lab work closely together. Having selected the appropriate chemistry, the project team starts to optimize the chemical structure and the formulation.

Apart from synthesizing the new product, the following aspects have to be considered during the “Lab Development” stage: (i) availability of the raw materials, (ii) production procedure, (iii) storage stability of the product itself as well as in the final application (e.g., paint system), and (iv) the commercial situation. Special attention has to been given to the patent situation immediately after initiating the project. Here, two aspects have to be considered: Can we patent it or do we infringe a patent (“Freedom‐to‐operate”). It is of strategic interest to file a patent as soon as possible to protect the business opportunity.

The progress of the project is monitored quarterly by means of a short review meeting. The current status of the project is discussed and reviewed according to the original objectives (timeline, budget, product requirements). Depending on the extent to which the current progress deviates from the targets, the status is changed from “Green” to “Yellow” or to “Red.” The “Red” status implies that a presentation at the next Steering Committee has to be given in order to discuss the situation and decide on the next steps. These actions could include expansion of the manpower, adjustment of targets, or termination of the project. All decisions and background information are documented in the Project SharePoint Platform.

At the “present stage,” scientists have their final opportunity to make any adaptions to the underlying chemistry since at the end of this stage the product concept will be frozen. This is the basis for further evaluations, that is, the selection of appropriate production sites, commercial calculations, and decisions on specification of the core product and raw materials. At this point in time, the patent situation also has to have been clarified.

At the end of this stage the decision is made to pass over the project to phase 4 “Scale‐up” within a formal meeting (Gate 3). Gate Keepers are the corresponding Business Line Manager or the Chief Technology Officer for technology projects, respectively. The decision is made on detailed information provided by the project team: cost analysis (raw materials, manufacturing, legal aspects), patent situation (freedom‐to‐operate, own patent protection), regulatory affairs (required efforts for registrations and notifications), production site (eventual investment for new equipment), and review of business plan (market potential, competitive situation). This decision is the most critical of the entire stage process as it implies significant financial commitment. It is expected that the project would not be discontinued after this point. Only the most attractive and promising projects should pass the gate. This is particularly true for the chemical industry because it is very capital intensive. All activities are monitored by the Innovation Management Office and documented in the Project SharePoint Platform.

5.4.4 Stage 4 “Scale‐up”

While the previous stage implied the development of a new product in small quantities (around 500 mL), the major task of the “Scale‐up” stage is to scale‐up the development/production process to technical quantities of up to several metric tons. Further, all other requirements that are necessary to launch the new product into the market have to be fulfilled, such as regulatory compliance in all relevant markets, materials management issues, and the strategy for market introduction.

To obtain precise process safety data, all new products and technologies have to pass the so‐called “Mini Plant.” This consists of 2 or 6 L glass reactors that are fully equipped with condensers and filling systems and that allow the reaction to run automatically. All necessary reaction steps are programmed and are executed and monitored by a computer system. These experiments ensure highly reproducible results under strictly controlled conditions. Furthermore, this system allows measurement of the energy that is consumed or released (“exothermic reactions”). The latter value is of greatest interest to evaluate the safety conditions for the process in larger quantities. Only reactions that have a maximum energy for the exothermic reaction far below the cooling capacity of the reactor will be approved for transfer to production sites; otherwise process optimization is initiated. All data are documented in a comprehensive safety report.

Next, scale‐up step reactions are executed in a pilot plant, which consists of several reactor systems of up to 120 L. Further process optimization is done without changing the performance properties of the product. Here, close cooperation between pilot plant, synthesis department, and the application testing lab is necessary. Samples are usually sent from the pilot plan batches to selected customers. Feedback from customers is very important at this stage, because any deviations in quality have to be detected during the scale‐up process.

Finally, the new product is transferred to production scale. The reactor size is typically between 1 and 10 m³. Samples from the production batches are carefully analyzed and tested in the application laboratories. It is essential to ensure that the performance of the new product coming from the production batches complies with the characteristics of the original lab product.

Over the last decade, regulatory compliance has also become an important issue during the “Scale‐up” stage. Especially when operating on a global basis, the new product must be registered or notified in all relevant countries of commercial interest. In Europe, the substances of the formulation have to comply with REACH (Registration, Evaluation, Authorization of Chemicals); in the United States the product has to be registered according TSCA (Toxic Substance Control Act), and in Japan the product must comply with the MITI regulations (Ministry of International Trade and Industry) (to mention just a few). If the product is supposed to fulfill a specific field of application, additional (specialized) compliance checks are required. For instance, all products that are in any contact with food have to be approved by several legislations (PIM in Europe, FDA in the United States). Testing for registrations or notifications can take several months and can cost several €100 000. For example, the expenditure for REACH testing for a substance greater than 100 tons per year is roughly in the range of €400 000–€500 000 and will take about 18 months.

A successful introduction of the new product into the market requires an adequate marketing plan (target segment, pricing, promotion, distribution). Typically, the new product is presented to the sales forces during global conferences or via Web‐Ex meetings. The project is closed after a successful market introduction and the first production batches (Gate 4). The results are documented by the project team and stored in the Project SharePoint system.

5.4.5 Stage 5 “Ramp‐up”

After having introduced the new product into the market, the response from the customers and the commercial development is monitored by the Innovation Management Office. The feedback from the customers is collected and evaluated against the original Project Application Form (PAF). As the customer decides whether the new product becomes an innovation or not, it is crucial to include the customers’ views during the whole process. Monitoring sales figures represents the basis for evaluating the commercial success of the new product. In so doing, firms can adjust their value offering by means of early modifications to the existing product or by initiating new product developments.

During the ramp‐up phase a post‐project review session is organized. Here, the overall project performance is discussed and improvements are proposed. The commercial development is monitored over a period of 5 years.