Chapter 3

Applying Scientific Reasoning to the Field of Marketing and Business

The Dow Chemical Story

An interview with Timothy D. Rey, Director, Advanced Analytics, Business Services, The Dow Chemical Company

There are three ironic twists to this interview. First, few organizations truly apply scientific reasoning to solving marketing and business problems. That’s a primary reason for my writing this book. Second, if you were to guess which companies are the most likely to do this, organizations such as Coca-Cola, General Mills, or Procter & Gamble might readily come to mind. You would think of companies with humongous advertising and marketing budgets—not a manufacturing company that sells primarily to other manufacturing companies to make products that eventually are sold to people like you and me. Third, you might expect that I would interview someone who has spent decades developing high-falutin mathematical models designed to extract innovative insights from complex consumer transaction data bases, rather than someone who began his career trekking through Midwestern forests, calculator and compass in hand, working toward an MS in forestry biometrics at Michigan State University.

Tim Rey’s path from Michigan forests to being the director of Advanced Analytics is not quite as crooked as a branch off a Chinkapin Oak, a tree native to the region. Right after earning his master’s degree in 1979, he joined the Math Applications group in Dow’s Central Research function as a research statistician. His work then was focused on business and manufacturing optimization problems and was far removed from where he often finds himself today—helping marketers make better marketing and business decisions. His path led him to supervise the Math Applications group in 1985 and then on to manage the Research and Technical Applications group in Central Research in 1987. In 1988, he took on the technical management role for the SimuSolv nonlinear simulation, optimization, and estimation commercial software development effort in Dow’s Central Research organization. His journey into marketing was launched in 1996 when he moved to Dow’s Marketing and Sales Expertise Center to lead the development of Dow’s Customer Loyalty program; he was also named the lead Marketing Research process owner. In 2005, Tim became the manager of Dow’s Advanced Analytics group situated in Dow’s Information Systems Department, reporting to the VP of IS, and most recently became director.

Developing theories, testing hypotheses, using principles of logic to scrutinize the soundness of marketing and business propositions—some of the stuff that Tim and his group do—sounds awfully academic, reflecting topics unfit for a marketing manager with conference calls to schedule, deadlines to meet, and budgets to finalize. This sentiment has certainly hit home with me. I have worked with several clients who told me not to use words like “theory” or “hypothesis” in my meetings with their marketing and product managers.

Nonsense.

Theory building, critical thinking skills, and, yes, even the word “hypothesis” are not only acceptable at Dow, but also embraced by this Midland, MI chemical manufacturer—the largest industrial chemical company in the world. And even if you don’t have a phalanx of PhDs and statisticians on staff and are a fraction of the size of Dow, Tim’s advice to my readers is that applying scientific reasoning to solving business and marketing problems pays off. As he is famous for saying in presentations he makes at universities and associations around the world, “It’s all about the money!” In other words, increasing Dow’s profitability.

* * *

Terry: Why do you call your department Advanced Analytics?

Tim: Because of the level of mathematical rigor, scientific thinking, and the scientific method that we apply to solving business problems. The people in the group are all advanced degree mathematical types and we solve business problems that have enough risk to warrant the use of advanced methods to reduce that risk.

Terry: Give my readers some background on the history of this department.

Tim: Dow is a science and technology company, and for 75 years we have been using science and mathematics in R&D, engineering, and manufacturing. Our Chief Information Officer (CIO) had the idea that we should bring some of those scientific reasoning skills over to the business and marketing side of the Dow environment, and so he established our department with two of us back in 2005. We were kind of refugees from R&D. We have 20 people in the department now.

Terry: Can you elaborate on that?

Tim: Well, developing our department had to do with trying to get a competitive advantage with the rich data sources that are now available to companies both inside and outside. So these rich data sources are sort of, in a sense, latent information. They are sitting there waiting for people to try to extract information and turn that into knowledge, which then provides a competitive advantage because the data is yours, and yes, you may be using a common system, like SAP, or you may even be using common tools, but the way you extract that information and translate it into knowledge actually ends up being intellectual property and, thus, has a very good chance of giving you a competitive advantage. But, of course, and in line with your book, data without good scientific reasoning is not very useful. I noticed in one of your recent e-mail signatures, Terry, that you quote Kant, “Theory without data is empty, data without theory is blind.” That pretty much sums it up. You can have a lot of data, and sophisticated statistical software, but without good scientific reasoning and thinking skills, you’re up a creek without a paddle.

Terry: What is your department’s mission?

Tim: The mission is to create value for the company—that is, to increase our profitability.

Terry: Tell me about why there appears to be such an important link between what you are doing and decision making.

Tim: The world is complex. We pay our managers, directors, VPs, and department heads to make complex decisions. Making these complex high-value decisions isn’t oftentimes something that is just self-evident. Understanding how a market works, building a “theory” of that market, if you will, helps us understand how a business unit can positively impact that market. Additionally, if you can translate the decision or the business problem into mathematical terms, guided by your theory, into cause-and-effect type relationships, then you can give that business decision maker another look at the decision they’re making. You are trying to optimize a successful decision.

Terry: You recently gave a presentation at Iowa State University, which I attended, and on one of your slides you said, “It’s all about the money.”

Tim: That’s why we develop theories and build models, to make more money. Whether it’s trying to increase sales, reduce costs, increase margin, all those decisions reflect some impact on the bottom line. The models that we use help reduce costs. They help gain share. They help us capture more of a product’s value. All of it is really about trying to help Dow be more financially healthy. And in large measure, what we are trying to do in my department is to borrow from science to help marketers and other executives become better decision makers.

Terry: How do you know you’re generating a positive return on investment for Dow?

Tim: In the early days, when we first formulated the group, we were asked to rigorously track the value we were creating. So we leveraged a tool called Portfolio, and there was a formal financial approach for tracking value in those first two or three years. We actually tracked several hundreds of millions of dollars of what we call indirect value and a comparable amount in direct value. We used both the EBITDA (earnings before interest, taxes, depreciation, and amortization) and NPV (net present value) in this effort. We don’t do this anymore because we now know that our return is greater than ten to one.

Terry: How do you promote, present, and explain your department to your average internal customer?

Tim: First off, our department has an overall communications plan, and the types of things we do to promote ourselves range from the really simple (e.g., we have our internal website on which we post events)—to having a wide variety of examples and case studies we can review with internal clients. We have an annual analytics day where some 300 people come in and see keynote speakers such as a representative from the SAS Institute or our CIO may give a talk on the use of data in our industry.

When we present our offerings to internal clients, we don’t talk in the context of, “Well, we can build a model for you.” Rather, we say, “Do you have problems where you might want to do “what if” questions? “Would you like to better predict the outcome of certain events or certain decisions that you make?”

Terry: Clearly, you are developing many different kinds of models for Dow. Let’s focus on helping your decision makers understand how their customers behave, such as the question, What drives brand loyalty?

Tim: There is a large voice of the customer (VOC) framework that is now pretty rigorously tied to our Six Sigma initiatives. There’s a Master Black Belt assigned to each of the businesses, and lots of the external marketing research is done through this whole concept of VOC. Additionally, we have centralized brand studies being done as well as conducting the more traditional customer satisfaction and loyalty models. We also look at customer retention and attraction, and customer lifetime value. But we are in a unique situation. Many of the industries we serve have a small number of customers that purchase the products we sell—after all, most of what we do is B2B. In a given market, it would be difficult for us separately conduct a brand loyalty study and a segmentation study—customers will only complete so many questionnaires. Consequently, we often combine these studies into one larger study. We left corporate brand issues to be done by the corporate brand folks, but positioning, segmentation, satisfaction, and loyalty for a given strategic business unit are often conducted in one study.

Terry: Why do you build these loyalty models?

Tim: Obviously, we want to strengthen our customers’ loyalty toward Dow. But let me tell you something very interesting with respect to those loyalty studies. A while back, we were able to do a cross-sectional study across our businesses and connect it to behavioral information like retention and attraction, financial impact, to see if we could prove whether loyalty was connected to financial impact. And most certainly, it was.

Terry: How are you improving critical thinking skills at Dow?

Tim: Six Sigma training program is separate from the Dow Marketing University, and critical thinking skills are taught in both of those environments. There are specific tools. I can think of one called the Six Thinking Hats in Six Sigma. There’s a whole cadre of methods and tools that are introduced to the green belt project leaders all the way through to black belts and master black belts. The tool sets are all about the critical thinking environment and trying to extract information in order to brainstorm new solutions, to look at processes in a critical way—either to improve a process, which is what the MAIC (Measure Analyze Improve Control) portion of Six Sigma is, or to totally redesign processes or systems which is what the design for Six Sigma framework is. Six Sigma is just inlaid with various tools and methodologies for trying to leverage critical thinking, for fixing processes or designing new. In the Dow Marketing University, the critical thinking comes in with regard to trying to understand what our value propositions actually should be, to have them segmented properly and understand in a critical way what the right offerings should be for certain markets, either emerging or established markets.

Terry: Do you ever use the word “theory” when you are talking to your internal customer?

Tim: Yes, because what we try to do is have our internal clients describe the structure of the problem—and whether it’s an econometrics problem or whether it’s a customer loyalty problem—we are always trying to develop theories that help us understand the particular problem that they’re asking us to work on. What are the cause-and-effect relationships that influence market behavior? Theory is not a bad word at Dow.

Our internal clients provide the initial insights to help us build a theoretical framework explaining their market. We often build on those initial insights with exploratory research such as interviewing a small number of customers, or doing a literature search to see if anything has been written about the topic we’re investigating—such as “What drives brand loyalty?” After doing our homework, we can statistically model these relationships in a quantitative study. Combining the internal client’s knowledge of the market with our critical thinking and modeling skills is where the synergy is.

Terry: Based on my experience, the word “theory” is avoided like the plague in the business world. In fact, in my book I quote a senior executive friend of mine, a former McKinsey consultant, saying, “From bitter experience I know that the American corporate world is not just anti-intellectual. It’s rabidly anti-intellectual. Theory smacks of academia. Aversion to its explicit cultivation in business is one of the defining differences between the two cultures.” What makes Dow embrace this idea of developing theories?

Tim: I think it’s a combination of things. First, we are a science and technology company. We hire Ph.Ds. to do chemistry and engineering, and so it wasn’t a large leap to ask the question, “Shouldn’t we be using the scientific method and scientific reasoning to solve our business and marketing problems as well?” Another part of it is that I believe a data-driven culture can move into a model-driven culture, and Six Sigma has helped us to understand how to do that.

Terry: Have you encountered any problems or challenges in bringing the scientific method and scientific thinking to understanding business and marketing problems?

Tim: Yes, sometimes senior executives are not as patient as they need to be, because building theoretical models takes time. Small projects run about two months, and you know, the normal project is in that three- to six-month time frame, and the large projects take, you know, nine to twelve months.

If it’s a problem we haven’t been able to solve or haven’t worked on or complained about for fifty years, why should we be asking for a three-day solution? Give the professionals the amount of time they need to solve your fifty-year-old problem, or decades-old problem, or 10-year-old problem. The pace of business smashes up against the scientific method, and some people just don’t have the patience for it.

Terry: What kinds of senior executives help promote the application of scientific reasoning to business and marketing problems?

Tim: The best senior executives who understand this have a background in science. For instance, one of the guys who oversees one of our businesses has a Ph.D. in chemical engineering, and he came from R&D. He’s perfect for this stuff. As we get more people who move from the science and technology side of Dow into the business side of Dow, we become better at applying the scientific method and scientific thinking to business and marketing problems. We are really trying to do the title of your book, Applying Scientific Reasoning to the Field of Marketing—and business in general, because not everything is marketing.

Terry: What is the major source of pushback that you get from prospective clients?

Tim: Some have the fear that their problems are too complex to be able to solve with any particular framework and so that seems to be about the biggest push back we get. Also, some fear that the services we provide may take over their decision process, which could not be further from the truth. As you know, the critical thinking, scientific reasoning, and other frameworks we bring to the table are a rigorous second opinion. Decision-makers still need to exercise their own judgment in making decisions, in light of all the information available to them.

Terry: So, as I understand it, you’re taking the scientific method and the scientific way of thinking, and you’re applying it to marketing, but you are also applying it to business problems such as distribution issues, commodity acquisition issues, and so forth.

Tim: And, strategic issues.

Terry: But what do you say to the reader who works for an organization that does not have many, if any, Ph.Ds. or scientists working for them who can help foster the scientific way of viewing business problems?

Tim: You have to recognize that you need knowledge to run and manage a business well, and the scientific way of thinking has a lot to teach businesses about how to create knowledge. In fact, the sciences are the most successful fields of study in creating knowledge. Who does it better? So you have to buy into that idea first.

Second, begin small. Get one or two people in your firm that have an understanding of what scientific thinking is all about, and distribute this knowledge in the company—don’t have a centralized “think tank,” or whatever. This creates too much of a “we” versus “them” mentality. For example, here at Dow, we have a core group of people that have the higher end skill sets; however, we’ve trained hundreds of people to use basic exploratory statistical tools to do data mining, and those people have a wide variety of skill sets and backgrounds. So we have always used a blended model: a distributed group of people to do some of this work and a core group to do the real “heavy lifting,” and to provide internal consulting services to our businesses. Other companies take a different approach. I know some companies take a very much centralized approach. Much of the model building, especially for business issues, is still done out of R&D or in a strategic planning department. Well, that’s the first thing our CIO did—he got us locationally close to the business units where we are more “partners” than a separate department. Although we are a separate department, we don’t act like it. We’re not in R&D. We sit—as you see, we’re sitting right in the middle of the businesses here. The epoxy business is on one side of my office and polyurethanes on the other side, and the amines and oxygenated solvents businesses are down the hall. That’s an important step because you’re visible. You’re physically there.

Finally, you teach the business units how to use some of our tools and methods. We have internal educational programs that teach critical thinking skills, for example.

Terry: How does the reader of this book convince his boss that applying the scientific method and scientific reasoning to marketing and running the business is worth the effort?

Tim: Well, it certainly wasn’t all wine and roses even starting up here. I mean, we took the typical approach of looking for innovators, people who were willing to try it. We were very much in a sales mode in the early years to find people who were interested in our mission. We had to, and did get, some quick wins—you know, smaller problems, things where the data was readily available. It was pretty obvious what you were trying to do, but you couldn’t just do it with an abacus or a spreadsheet. You had to have a little bit of sophistication in order to solve the problem and we just started to pile up those kinds of examples.

We find time and time again that even though there are smart people working at companies, they often don’t translate successful examples drawn from other industries. For instance, you know that financial institutions, the airline, hotel, and entertainment industries do a lot of what we would call price optimization. They look at time. They look at demand. They look at the kind of customers they have, and for instance, when you call in to make a reservation for a vacation spot somewhere, if it’s through the Harrah’s Hotel chain, they’re running price optimization models daily across their whole customer base. You won’t get the same price today as you tried to get a week ago. And yet, if you show some people that and say, “You know, that would work here in the chemical industry,” they can’t make the connection. So that’s part of the sell too—to try to make it something that they can see themselves in, and not make them make too far of a leap of faith into the examples that you are using.

Terry: This idea of critical thinking, how do you approach it in Dow? How do you help people think more effectively? How do you teach them to think more critically?

Tim: Well, I think it has a bit to do with visualization. I know when I first started out in R&D working on engineering and chemistry problems, you know, I used to say, that if you’re talking to some engineer about an extruder, you’ve got to be thinking you are inside the extruder or on the impellers. Or if you are talking to a chemist about molecules, you’ve got to be thinking about visualizing the structure of the molecules yourself. That whole concept of visualizing the problem, whether it’s a marketing problem or a supply chain problem or a purchasing problem, is really important, to be able to think and see the problem.

The other thing is the whole “detective nature” of asking questions, being able to hear what business managers are saying and asking the right questions for clarification or asking them the questions to go to the next layer of the problem. Over time, we have developed an entire infrastructure that teaches problem solving and critical thinking using Six Sigma or the DMAIC (Define, Measure, Analyze, Improve, Control) and DFSS (Design for Six Sigma) processes.

The way that those processes are laid out—and we have so many Six Sigma Green Belts that know this process—that it becomes a synergistic thinking process to solve a problem because they know the backbone of Six Sigma.

Terry: So what you’re saying is you have Six Sigma critical thinking training programs here at Dow.

Tim: Yes, many of the tools are critical thinking tools.

Terry: Were the critical thinking tools in your Six Sigma program developed internally or externally?

Tim: It’s a bit of both actually. I mean, a lot of it came from where we started early on with the Six Sigma academy. Then we switched over to a consultant, and then we went on and developed our own programs and brought in various tools. You know, once we had heightened our own capability, then we could see where we would bring in other tools and kind of tack them on to certain spots in the process.

Terry: How do you teach critical thinking at Dow Chemical?

“I believe that our application of scientific reasoning and critical thinking skills to solving marketing and business problems helps us have the kinds of returns that allow us to invest heavily in environmental stewardship and to be a world leader in that area.”

Tim: Well, I believe you can actually find it in our online learning. Dow has a place up on our internal website where you can build your own learning curriculum, and there are critical thinking tools and classes sitting up there that people can actually just sign up for and take. All of the material on critical thinking is integrated into specific learning modules in our internal Dow Marketing University. For example, critical thinking skills are tailored to a specific learning module. Example learning modules offered through Dow Marketing University cover issues such as branding, competitive analysis, customer value management, and decision science.

Terry: When developing a theory for a given market, management needs to base that theory on all the information they have available—internal research, proprietary research, and market knowledge drawn from executives in marketing and sales. How do you do that integration for an internal client?

Tim: In the strategy group at Dow, there’s a method we use called the SDP, Strategic Development Process. It’s a series of 16 half day classes, and what a business does is that they take their team through that series of classes, and then for the next three to four months, they do what the class teaches in order to develop their strategy. And part of that is what you just mentioned—integrating all the information and knowledge we have on a particular market into a comprehensive view or theory of the market—“What are the major factors driving buying behavior, pricing, and so on?” SDP is the one place where I’ve seen as comprehensive a look at a total market as you get out of any other planning process in the Company.

Now, it’s rigorous. It’s long. People might even say it’s painful, but it has all the structure of doing that. Some people may know it on the outside as value-based management (VBM). We call it SDP now, and we have branded it, and do it.

Terry: So that information doesn’t leave Dow Chemical if an employee retires, quits, or is transferred.

Tim: No, it is all documented. SDP is a kind of knowledge management function as well because everything is documented, and in various places. Sometimes it shows up on our internal websites so that everyone in a business can understand a particular business unit’s strategy and the marketing information that supports it.

Terry: This whole process that you’ve described is a kind of competitive strategy for Dow.

Tim: Yes. The way we have come to apply scientific thinking to marketing and business decision making is a strategic advantage for Dow, because it is very difficult for competitors to replicate. Even so much so that we have some specialty management hiring practices to try to bring in people who can think in this scientific kind of way. For instance, the Masters of Financial Engineering at Berkeley teaches people how to think very effectively with respect to financial and planning issues. People who have mathematical, econometric, sophisticated financial, and science backgrounds bring the kind of thinking skills we’re looking for.

Terry: Talk to me about the human element advertising and how developing theories, applying the scientific method, applying critical thinking skills helps you achieve the human element mission.

Tim: Dow has always been a leader in sustainability. We have won many, many environmental awards. We are generally number one in receiving environmental awards among chemical companies. I believe that our application of scientific reasoning and critical thinking skills to solving marketing and business problems has helped us have the kinds of returns that allow us to invest heavily in environmental stewardship and to be a world leader in that area. That stewardship comes from having sustainable products, and sustainable businesses, that are environmentally proper. So all that we’ve been talking about today, this idea of applying scientific reasoning to business and marketing, we also do that when we are building our plants, and working with our channel members to distribute our products in an environmentally responsible way.