‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

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MASTER THESIS FOR MSC IB&M - THEME D 2014-2015, SEMESTER 2

‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION

IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

THIJN HOETJES - S1907247 T.C.HOETJES@STUDENT.RUG.NL

UNIVERSITY OF GRONINGEN, THE NETHERLANDS FACULTY OF ECONOMICS AND BUSINESS

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‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION

IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

ABSTRACT

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INTRODUCTION

The chemical industry represents an important part of the global economy, producing a large variety and quantity of chemical products. The size of this global industry has been estimated at $2,912 billion in 2011, and is predicted to grow to $4,174 billion by 2020 (Hong, Liu, & Luedi, 2013). In this market, big players such as BASF have reported revenues of 74 billion euro in 2014 (BASF, 2014). A large part of the chemical industry is comprised of the specialty chemical industry, which reported total sales revenues of $500 billion in 2013 (AkzoNobel, 2013). This specialty chemical industry will be the main focus of this thesis.

Chemical products reach a large variety of sectors, such as food, tools, machinery, vehicles and the automotive industry. The automotive industry for example, is a large market, and growing steadily. Gao, Hensley & Zielke (2014) calculated that the compounded annual growth rate of the automotive industry is 3.4%. In this industry, markets such as Europe and North America are growing steadily, and China is predicted to grow explosively, from 8 million units in 2004, to 25 in 2014 and 30 in 2020 (Gao, Hensley, & Zielke, 2014). Profits are growing as well, with 41 billion euro in 2007 and 54 billion euro in 2012, showing that the industry has recovered from the economic crisis. Profit predictions show an even bigger growth in the future, with an estimation of 79 billion euro profit by 2020. In this industry, premium cars are on the rise, with the top ten countries of the world having sold 4.2 million premium cars in 2002, and 5.6 million units in 2012, implying a compound annual growth rate of 2,66% (Sha, Huang, & Gabardi, 2013). In the same article it is predicted that the compound annual growth rate until 2020 will increase to 5,36%, suggesting that 8.5m premium cars will be sold in the top ten countries alone. In this market, China again plays a major factor. It grew from 57k premium cars in 2002, to 1.2 million in 2012, and is expected to become the biggest selling in the world by 2020, with 3m units (Sha et al., 2013). This increasing growth is a huge opportunity for a large number of companies in the chemical industry, which are part of the supply chain in the premium car industry.

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For the international marketers in the automotive industry asking themselves where to play and how to win, the figures on the Chinese market strongly suggest that this market will be largest and most profitable one. But, the Chinese market is specific and has its unique needs and preferences. Research comparing the Chinese and the German market of affluent premium auto buyers, found that Chinese buys are more interested in powerful, high-tech cars, whereas the German customers value comfort and handling (Sha et al., 2013). These difference pressure companies into the tailoring of their products, which in turns pressures them to innovate both their capabilities as well as their products.

The opportunities in the market cause a large amount of players to enter the market. Companies from all over the globe compete in the market, with Asia being at full volume, USA catching up, and Europe lagging behind (Dufoix, Hanff, & Krotz, 2013). With a market of such international nature, culture could play a factor in how companies operate, and handle the pressure to innovate.

Innovation is an important topic in the whole industry, and it can be interpreted in many different ways. Steve Jobs, the former CEO of Apple, famously quoted that ‘Innovation distinguishes between a leader and a follower’ (Roderick & Gaze, 2011). However, there are many more definitions and takes on innovations. Dr. Kreis, head of Global Technology and Product Development Management at BASF coatings, sees innovation as the moment where the market prefers your solution to the competitor’s, and states that it is when the market yells ‘hurray’. His colleague dr. Druva, head of BASF Automotive OEM and Industrial Coatings adds that Innovation is also the ability to find new ways to add value (Kreis & Dhruva, 2010).

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distinguishing between ‘product R&D’ and ‘process R&D’, separating advances in products from improvements in production (Plehn-Dujowich, 2009).

In the chemical industry, innovation plays an important role. An example of this can be found in the premium car market, of which it has been established that it is a large and profitable market, and expected to grow rapidly (Sha et al., 2013). In this market, there is a high amount of competition and great cost reduction challenges for the car companies. These challenges increase the demands imposed on the suppliers, which in turn creates innovation challenges for companies across the whole supply chain. The paint manufacturers are also put under great pressure to innovate, which causes high demands to be made of their chemical suppliers.

As a result of this research in the chemical industry, several trends related to technology change can be identified. Whereas the car painting process used to consist of four steps, innovation has led to one step being taken out. Also the market used to be solely comprised of demand for solvent-based paint, yet now, due to the increasing amount of legislations and the increasing quality of water-based paint, water-based paint offers the biggest growth potential. These technology changes exert a large amount of pressure on companies to keep up with the competition. But this pressure is not limited to the premium car sector alone. Companies in general facing technological change threating their core competencies with becoming obsolete are under high pressure to innovate in order to keep up with these changes. Companies in this position have a large amount of options available to address the pressure for innovation. This challenge is encapsulated in the main research question of this research:

What is the most effective strategic path for the global specialty chemical industry, in order to reach innovation?

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LITERATURE REVIEW

The resource-based view suggests, that in order to gain superior performance compared to competitors, competitive advantages have to be formed by a company (Lu, Yuan, Zhou, Lianxi, Bruton, Garry, Li, Weiwen, 2010). These valuable resources should be heterogeneous and imperfectly mobile (Peteraf, 1993), in order to gain resources that allow a company to offer superior products or services compared to their competitors, fostering performance. It should be noted that aside from resources, also capabilities could also be a source of inimitable and sustainable competitive advantage for a firm, since these can be transformed into superior products or services, compared to the competition (Lu, Yuan, Zhou, Lianxi, Bruton, Garry, Li, Weiwen, 2010). In order to acquire a form of competitive advantages, companies can choose from a variety of strategic paths towards innovation, in order to develop these resources or capabilities.

Global Specialty Chemical Industry

Dufoux et al. (2013) mapped the chemical industry in their research, based on the three regions that play the largest role in the industry: USA, Europe and Asia. They found that for the firms based in these regions, Asia is at full volume, the USA is ‘catching up’, and Europe is lagging behind. The core of the industry has shifted to Asia, with almost 50% of global sales and a prediction of 3% average growth. The USA has a shale gas boom which functions as a growth driver, as well as a high local demand in the automotive industry, and healthy credit quality. For Europe, the high costs, eroding markets, and insufficient ability to invest in new facilities and

production, explain why they are considered to be lagging behind (Dufoix et al.,

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FIGURE 1 (Dufoix et al., 2013)

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FIGURE 2 (Liveris, 2013)

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FIGURE 3 (ICIS, 2014)

The companies that are most diversified, BASF, DOW and DuPont (currently renamed to Axalta), all score very high on the ICIS top 100, ranking 1, 5 and 8 respectively. Other companies that are diversified into multiple sectors also rank very high, such as Sinopec at rank 2, Sabic at rank 5, LyondellBasell at rank 6 and Shell at rank 7. The only company in the entire top 10 which narrowly focused is Mitsubishi Chemical at 9, and although some diversified companies score low on the list (most notably Ashland at 56), it can be concluded that the diversified and integrated firms are indeed the largest ones, whereas the companies that are more narrowly focused are typically the smaller players.

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Technological Changes

As a result of the preliminary interviews conducted with employees in the chemical industry, several trends related to technology change have been identified. One stated that ‘Innovation can greatly change the market’, providing an example in the car painting process, which consists of four steps, the application of an E-coat, a primer, a base coat, and finally a clear coat. After years of research, BASF has been able to introduce a new product that combines the properties of both the primer and the base coat into one layer, saving an entire applying and drying step, illustrated in figure 4. Since the primer layer has to be dried at a temperature between 160 and 200 °C, this innovation saves energy, time and money for the car manufacturers, and is predicted by experts to become the new standard. This process has also been discussed in the literature, describing this new, innovative technology of BASF being implemented in their factory in Brazil (Kreis & Dhruva, 2010) .

FIGURE 4 (BASF, 2013)

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those who have a small amount of cars coming through, the drying time is not relevant, and the demand for innovation in that sector is low.’

Another example of a technology change has been identified, whereas the market used to be solely comprised of demand for solvent-based paint, yet due to the increasing amount of legislations and the increasing quality of water-based paint, water-based paint offers the biggest growth potential, putting a pressure on the companies specialized in solvent-based paint. All these examples of technology changes show how innovation can make the products of companies obsolete in the market, pressurizing them to innovate as soon as possible in order to stay competitive.

Strategic Paths

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FIGURE 6

(Dufoix et al., 2013)

The research by Dufoix et al. (2013) illustrates how often the different paths are taken in both the standard scenario, as well as when disruptive innovation is needed. However, it does not answer the question which path is most effective, and in what context. In an attempt to find out, the three paths found by Dufoix et al. (2013) (See figure 5) will form the framework for the paths to be analyzed in this research. In addition, this research will be more specific with regard to the acquisitions, dividing it into two categories: horizontal and vertical integration.

Internal R&D

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process, BASF uses a Phase Gate process with accompanying software, breaking the innovation process down into discrete phases. At the end of each phase the process are studied in relation to the established objective. This ensures the company that that they are still on the right track and reducing the chance of failure. At BASF, this has said to lead to optimal resource allocation, teamwork and rapid decision-making, which are in turn important elements used to achieve innovation (Kreis & Dhruva, 2010). However, the increasing specialization of useful knowledge makes it difficult for firms to rely entirely on in-house learning processes (Pavitt, Prencipe, Brusoni, 2001), and thus, firms facing these challenges have to make strategic decisions as how to react.

Vertical Integration

Aside from the resource-based view, one can also look at vertical integration from the dynamic capabilities approach, which advocates looking at performance from a different perspective, as it endeavors to analyze the sources of wealth creation and capture by firms (Teece, David, Pisano, Gary, Shuen, Amy, 1997). The article by Teece et al. (1997) defines dynamic capabilities as ‘the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.’ Afuah (2001) makes the link between dynamic capabilities and innovation, finding that during rapid technological changes, companies can acquire the capabilities needed to remain competitive through vertical integration, resulting in better performance (Afuah, 2001). It is argued that without this, the capabilities of both suppliers and assemblers will be rendered obsolete (Afuah, 2001).

Pavitt, (1991) makes a clear distinction between small and large firms in its research,

stating that large innovative firms in the 20th century have shown resilience and

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vertical integration, horizontal integration and partnerships. The example of the microprocessor chips in the research by Afuah (2001) illustrates that vertical integration can be very important in the technological industry, with the example of a company in the IT industry staying competitive in a changing environment, through vertical integration (Afuah, 2001). Following this reasoning, it can be expected that vertical integration would have a positive effect in the chemical industry as well.

Horizontal Integration

Looking from the resource-based view, companies should gain resources that allow them to offer superior products or services compared to their competitors, fostering performance. Aside from the options to horizontally cooperate and/or compete, companies can also acquire other suppliers, acquisitions that can be labeled as horizontal integration. Pavitt (1991) identified this as one of the key strategic opportunities for R&D based technologies, in order to enter into new product markets. Also, the article also outlines the option for firms to gain access to radical discoveries, by learning through a takeover. Aside from products, firms can also opt for horizontal integration to improve capabilities. Lu et al. (2010) state that acquiring resources from external corporations can enhance capabilities (Lu, Yuan, Zhou, Lianxi, Bruton, Garry, Li, Weiwen, 2010). These findings suggest that horizontal integration into a new technology has a positive effect on firm performance.

Partnerships

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Looking at partnerships from the Resource-Based View, it is highlighted that scarce innovation resources might have influential power over decisions in forming partnerships (Cetindamar, Dilek, Ulusoy, Gunduz, 2008; Grant, 1991). Research by Bakker et al. (2008) indeed found that having an innovation partnership is beneficial for innovation outcomes. In addition, the paper by Bakker et al. (2008) found that this effect is stronger for international partnership, provided that the set of countries is not too international (Bakker, René, Oerlemans, Leon, Pretorius, Tinus, 2008). Pavitt (1991) identified a method of learning through studying, where strategic alliances can be used to gain new information. His research also stated that innovative activities involve continuous and intensive collaboration amongst professional and functionally specialized groups, something that can be realized through collaborating with other firms (Pavitt, 1991). Using these findings, it can be inferred that collaboration with other firms has a positive effect on innovation.

Strategic Path During a Technological Change

Based on the findings from the conducted literature review, it can be concluded that the studied options, internal R&D, vertical integration, horizontal integration and partnerships, are all capable of having a positive effect on innovation. When technological changes affecting the industry are taken into account, the research from Afuah (2001) has shown that vertical integration has proven to the most effective strategic path to take in the IT industry (Afuah, 2001). To test if this will hold true in the specialty chemical industry as well, the first hypothesis is formed:

Hypothesis 1: The most effective strategic path for the global chemical industry during a technological change is to opt for vertical integration.

Firm Size

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more patent counts and citations per dollar of R&D (Plehn-Dujowich, 2009). Therefore, it is not exactly clear how, and to what extent size affects innovation. Pavitt (1991) characterizes the small firm as typically being specialized in their technological strategies, concentrating on specific areas. One relevant part of the chemical industry mentioned as an example, is the specialized chemicals industry. Large firms on the other hand, are characterized as having a broad array of technological activities, with their key strengths typically being based on R&D laboratories or complex production (Pavitt, 1991).

When firm size is taken into account, it becomes apparent that partnerships are a popular choice for small firms. Firms that are small, and have limited financial and managerial personnel resources actively seek resources from the external environment and inter-firm networks (Lu, Yuan, Zhou, Lianxi, Bruton, Garry, Li, Weiwen, 2010). One way his can be achieved is through knowledge spillovers, allowing small firms to achieve economies associated with large-scale operations (Adams & Jaffe, 1996) . For large firms in R&D-based technologies, Pavitt (1991) identifies horizontal diversification as being a key strategic opportunity into new product markets (Pavitt, 1991).

One expert mentioned a difference in demand for innovation based on firm size in the preliminary interviews. He stated that small firms have different customers compared to the large firms, implying that they deal with different demands. This means that small firms can focus on innovation in areas that do not play a role for the customers of large companies, or specialize in other areas than innovation. This way, small firms can still compete with the larger firms, despite the disparity in size and budget.

From these findings, we expect firm size to have an effect on the effectiveness of a chosen strategic path, leading to the second hypothesis:

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Culture

With the chemical industry becoming a truly global one, there are a large amount of players from a lot of different countries and continents participating. As illustrated by the frameworks devised by Hofstede (1980), the cultures of these countries can vary intensely. Hofstede’s cultural framework originated from a research conducted in the employee database of IBM, showing the cultural differences amongst employees from different nationalities at the time (Hofstede, 1980) . In his research, Hofstede (1980) identified collectivism versus individualism as one of the four (later five, or six) cultural dimensions used to measure the culture of a country.

Collectivism versus individualism is used to describe possible forms of the relationship between individuals and the groups to which they belong. In this context, Individualism on one side sees persons as separate entities, and collectivism on the other side of the spectrum has the distinction between individuals and their groups blurred. In a collectivistic culture, people are regarded and treated as an extension of their social system. An example showing this phenomenon is provided by an experiment by Bochner (1994), in which people from both individualistic and collectivistic countries had to complete 10 sentences starting with ‘I am’. As predicted, it was found that people from collectivistic cultures produced significantly more group-descriptions, and fewer idiocentric self-descriptions as people from individualistic cultures did (Bochner, 1994) . For the global specialty chemical industry, one of the challenges defined in the research by Dufoix et al. (2013), is the creation of a growth-nurturing culture (Dufoix et al., 2013).

The differences in collectivistic versus individualistic culture, could account for differences in how business is conducted, and how companies work together to foster innovation. Since collectivistic cultures think from a group perspective, the countries from collectivistic countries should as Japan, are expected to have a climate with a high amount of information sharing and participation, which in turn should promote innovation. This leads to the third hypothesis:

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METHODOLOGY

In order to address the challenges in innovation, primary data has been gathered from people in field, who have current experience in this particular market. This study has been somewhat positivistic in the sense that it has been conducted independently and objectively, but yet is has been mainly an interpretive research, using social constructions to collect the data. Whilst doing so, both a deductive and an inductive viewpoint were taken. It started with one on one, open-ended, qualitative interviews with employees of a large chemical firm, with one of the participants also having work-experience at another large player in the chemical industry. These interviews were interpreted with an inductive approach. The findings that emerged were then further examined in a literature review, using a deductive approach. Finally, quantitative and qualitative research was conducted, using an inductive approach. Since quantitative and qualitative research was mixed, the research started out as a multi-method research, which was conducted using surveys and interviews. The surveys were distributed in real-life, and the interviews have been conducted over the phone twice, but further only in real-life. The research was cross-sectional, conducted in a single point in time.

Data collection

Interviews

The qualitative data gained from the initial open interview will be used to gain current knowledge about the market and the strategic paths of innovation, and to see what issues are currently relevant in the industry. The qualitative data that was collected from the semi-structured interviews will be analyzed to identify trends for each of the hypotheses, including a comparison between small and large firms. The focus has not only been on whether the relationship between a strategic path and innovation is positive or negative, but also what the pros and cons are for each option.

Quantitative Questionnaire

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in Nürnberg, to high-ranking employees of chemical firms from all over the world. The European Coatings Show is a suitable venue to find employees from chemical companies from all regions and sizes, with 962 companies from 43 countries being represented at the show. The questionnaire has 4 themes, one theme for each strategic path that was outlined in the literature review. Here, it uses a 7-point Likert scale for the respondent to indicate how effective a strategic path is to foster innovation, with 1 point indicating it has no result/indifferent, and 7 points indicating effective/advantageous. To provide further detail on how the path should be conducted, some paths had sub-questions. For the vertical integration, a distinction was made, asking the participants to rate both upstream and downstream acquisitions. For horizontal integrations, ratings were asked for different types of capabilities that can be acquired, and also one open box labeled ‘other’, providing room for input if a capability was missing. Finally, for partnerships, different types of innovations were labeled, to ask for which type of innovation, a partnership would be most suitable. After the forms were distributed, some problems occurred. Some respondents were confused by the terms used in the questionnaire, and a few felt that answering questions related to these paths was difficult; due to the fact the focus of their job was narrower. However, most problematic was the fact that many respondents felt that a singe, overall rating for a path, would give a misleading view, since it largely depends on the context. The pros and cons of a path, and the situation in which one is most effective, could not be captured in a questionnaire, which is why it was decided to drop the usage of a questionnaire, discard the results, and focus purely on the qualitative questionnaire, which would allow for a more broad and detailed elaboration on the different strategic paths.

Qualitative Interviews

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DATA ANALYSIS

Word Analysis

As a result of the semi-structured interviews conducted with managers in the global chemical industry, transcripts were collected, and entered into NVIVO software to perform a qualitative analysis. When a word analysis was conducted on all the transcripts, some keywords became apparent, this is captured in a word cloud, visible in figure 7. The major topics that emerged when asked for innovation were the discussed paths; ‘internal R&D’, ‘partnerships’ and ‘acquisitions’, but another relevant theme that became apparent were the ‘customers’.

FIGURE 7

Note: sample consisting of all firms, extracted from NVIVO.

Customers

When a word tree was processed from the transcripts (see figure 8), it showed that many companies mentioned customers in a similar context. When asked their preferred path to innovation, the customers were often an important consideration.

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The word tree shows that the companies engaged with customers through talking with them, contacting them, partnering with them, discussed with them and made projects with them. In one case, they even tailored individually for their customers, in the process towards innovation.

FIGURE 8

Strategic Paths

In order to analyze the strategic paths, coding was performed, which was done to reference emotions, and the paths taken towards innovation. Emotions were defined as negative, neutral or positive, and the strategic paths coded were horizontal integration, internal R&D, partnerships, vertical integration. The whole sample was analyzed, and the output is provided in table 1.

TABLE 1

customers

with with on talking on talking on discussion on discussion and projects and projects

tailored for individual

suppliers , competitors and

suppliers , competitors and our our with with partnerships , partnerships , partnerships partnerships contact contact foster innovation . foster innovation .

from our own

fact that other

and talk to

you have , might

then provide the

as well as as well as . . We also have We also have

Our strategy for

For innovation management ,

For innovation management , ,

,

to foster innovation .

offering specialty products .

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As can be seen in table 1, it is found that both horizontal and vertical integrations were met with mixed emotions, and that internal R&D and partnerships were mostly positive. However, when the distinction of size is made, a change in this pattern becomes clear.

Firm Size

From the findings in the literature review, it is assumed that firm size affects the way companies conduct business. A theme emerging from the interviews, were the different strategies that companies of different sizes used to be competitive. Small firms focused on tailor-made products for their customers, fast response times, and flexibility. Large firms, with larger budgets, focused on innovation through large investments, offering products of a high technological standard. Then, a more detailed analysis was performed, aiming to observe if a change in firm size will also change the preference for a path, as was encapsulated in our second hypothesis.

Small Firms

In order to study the differences between the firm sizes, the sample used for the coding analysis was specified on companies with a small size (Companies with less than 10k employees), and the output of this change is provided in table 2.

TABLE 2

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Here, there is a clear distribution of the paths taken to innovation. Internal R&D and Partnerships are mentioned frequently and positively, and Horizontal and Vertical Integration are mentioned less often, and linked to mostly negative arguments.

Internal R&D for Small Firms

Every small company stated to be very reliant on internal R&D, with the amount of reliance varying between high to full. One company states it relies purely on internal R&D, whereas the others describe it as very important to the company, something that is focused on a lot, or a very important area to invest in.

Partnerships for Small Firms

Partnerships are mentioned frequently, and only with a positive attitude. One company even states that partnerships are the first step for all the projects. Partnerships are not uniform in the way they are used however. The most common form of partnership is one with customers, but there are also mentions of partnerships with universities, and the creation of loose networks to collaborate with. Also the motivation can differ, with one firm mentioning that partnerships are needed for small firms, so that they can get the most out the limited funds they have, and one other firm stating that partnerships are used to understand the demands of customers, so that they innovate in the right direction.

Horizontal Integration for Small Firms

Both the negative comments on horizontal integration were related to one single theme, the lack of funds to conduct horizontal integration. It becomes clear that for small companies, horizontal integration is either not considered, or simply avoided, due to financial constraints. In line with this reasoning, there was one small firm with a larger budget, which indeed stated that when a capability is necessary, it would be bought through horizontal acquisition.

Vertical Integration for Small Firms

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more additions were outlined. One company mentioned that there is risk of the acquired company being a bad fit, for example due to mismatched sizing. Furthermore, they mentioned the possibility of the company not keeping their promises, due to the bad fit, or due to a mismatch between the R&D department of the acquiring firm, and the acquired firm. One small company with a bigger budget has conducted acquisitions in the past, and these have proved successful for them.

Large Firms

In order to study the differences between the firm sizes, the sample used for the coding analysis has also been specified on companies with a large size (Companies with more than 10k employees), and the output of this change is provided in table 3.

TABLE 3

Note: sample consisting of large firms, extracted from NVIVO.

Internal R&D for Large Firms

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internal R&D to be successful it is important that the R&D department has to be very strong.

Partnerships for Large Firms

Partnerships are very frequently used amongst large companies, which was also the case for small companies. However, the tone used to describe them, were less positive for large firms, when compared to small firms. This difference is illustrated in the following word trees, where the word tree taken from the conversations with small firms is shown in Figure 9, and the one taken from conversations with large firms is shown in Figure 10. Here, it can be seen that small firms described partnerships as pivotal, whereas the large firms merely stated they had them.

FIGURE 9

Note: sample consisting of small firms, extracted from NVIVO.

FIGURE 10

Note: sample consisting of large firms, extracted from NVIVO.

partnerships through horizontal acquisition . We also use

through horizontal acquisition . We also use

specialty products . We also have close

sophisticated , established R & D department . Usually ,

small size . Instead , we focus on

or vertical acquisitions . I think that

majority of our innovations come from

with

universities , and projects with customers ,

our customers , in order to

are

the first step , together with

best for small firms , so

and creating loose networks to collaborate

, but the downside of this method

partnerships

vertical and horizontal integration , and

to buy a competitor / supplier .

to buy a competitor / supplier . through through when we go external , when we go external , We realize innovation We realize innovation

partnerships overall . The downsides of

no need for acquisitions or

is a low focus on

is a low focus on have

have

own global one . We

in place . We do in place . We do . We also . We also in general in general competency area competency area

Another unit uses long - term

Another unit uses long - term ,

,

selective . In terms of risk

do all the four options

with

our customers , and long

OEMs and producers , but

large international companies . Here ,

overall . The downsides of partnerships

or acquisitions , we keep the

or acquisitions , we keep the are

are

the intellectual property protections

also done and can

a compromise between internal

. Here our highest preference is

,

with our customers as well

vertical and horizontal integration , and

since it already has developed

applied in a broad fashion ,

and no acquisitions . A third

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The type of partnerships that were mentioned varied, there were joint ventures, and partnerships with large international firms, customers, suppliers, universities, competitors, and other business units of the same company. There were also some critical comments on partnerships however, with several companies stating partnerships received a low focus from them, or it being the least preferred path, despite the fact that it was used. The most common reason is the problem of intellectual properties, since it often becomes difficult to determine which company gets ownership of what. Furthermore, other customers might dislike the fact that you are partnering with their competitor. Then finally, there are also some risks involved when partnering with other firms. Partnerships can be unsuccessful due to the risk of uncooperative behavior, a resistance to change, or a disconnect if the sizes are different. Some more neutral comments stated that partnerships would only be successful when there are targeted to a very specific product, and that risk-wise, they are between internal R&D on the low-risk side, and vertical-integration on the high-risk side.

Vertical Integration for Large Firms

Whereas vertical integration was rare amongst small companies, it is common amongst the large ones. One company has it as their company strategy to acquire at least 1 or 2 companies a year, and another large firm has a separate budget funding small, new technologies, and acquire the companies producing interesting results. Vertical integration also has other purposes, allowing companies to acquire intellectual property rights, market access, market knowledge, valuable assets, or access to geographically valuable locations. Speed is an important characteristic of vertical integration. Companies get these benefits very fast, when compared to internal R&D or partnerships. Vertical integration is describes as ideal as long as they enhance synergy, and can be especially attractive when the project is far removed from the core competencies of the company.

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There is also the option of an initial misjudgment of value, and the integration into the company can prove to be difficult. In this situation, one plus one never seems to equal two. One final drawback, is that when an acquisition is made, the whole industry can see what you are doing, and predict future behavior. Therefore, there are some projects in which vertical integration is not an option for firms.

Horizontal Integration for Large Firms

Horizontal integration was met with mixed reactions. It was done as long as it enhances synergy, since it can add a capability, tech advantage or improve speed to market. On the other hand, the downside that was often mentioned is the risk of that there being little added value in the end. Also, most large companies stated not to be interested in horizontal integration, due to the fact that they already had everything in place.

Size Differences

From the analysis, it becomes apparent that depending on firm size, there are indeed large differences in effectiveness of strategic paths, supporting the second hypothesis of this research.

Culture

Contrary to our expectations, several firms commented on the fact that the information-sharing climate in japan is closed, silent and regulated. The European climate on the other hand was described as very open and cooperative, meaning that the third hypothesis of this research is not supported.

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Communication

When asked how innovation was achieved, one term that was frequently introduced by the respondents was communication. Many companies, regardless of their size, stressed the importance of communication with their customers. Many companies are very market-driven, with one even organizing innovation days where ideas and demands can be discussed with their customers. Also internal communication was mentioned, with one company employing the strategy of sharing information across all their business departments over the world, optimizing their innovativeness. One company explained that communication is not only important in the process leading up to innovation, but also after the innovation has been made. It has to be explained and sold to the customer, since innovation that nobody wants is merely ‘fake innovation’.

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CONCLUSIONS

Strategic Paths

Amongst small firms, internal R&D is a major focus and highly prioritized. It also plays an important role for large companies, but for them it cannot be the only path travelled towards innovation if they want to keep up with the competition, and the technological changes. Furthermore, it has to be taken into account that it is time consuming, requires strong R&D and there is a threat of wrongly allocated resources, making the addition of other strategic paths attractive. Risk-wise the Internal R&D option is seen as a low risk, but low reward in the short term.

For small firms, partnerships are very important to enhance their capabilities and increase their innovation output. It is used in a variety in forms, for example with universities, customers, or competitors. Partnerships are also a popular path for large companies, and again come in this large variety of forms.

Partnerships do have their drawbacks however, such as the distribution of intellectual property rights, with tension arising around the subject of which company acquires what. The reaction of other customers should be taken into consideration as well, as customers can react negatively when a partnership with their competitors is initiated. There is also a bit more risk involved when compared to internal R&D, due to the fact that companies can be over-valued, or do not always keep their promises.

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acquisition is made, which is another argument supporting the use of vertical integration as a response to technological change, instead of an initiation.

The transcripts point out that for small firms, the budget is the major factor used when deciding whether horizontal integration will be conducted or not. Horizontal integration showed to be a fairly unpopular option for large companies, since often little extra value is seen. This is partly due to the fact that large companies already have everything in place, and no longer have the need to horizontally integrate further.

Customers

Customers are an important consideration for companies, determining in which direction they innovate. In order to understand the demands of the customers, companies engage in extensive communication or even partnerships. Small firms were able to tailor their innovation and product directly to individual customers, whereas large firms used the demands of customers, or the situations they were in as goals or starting points for innovation.

Culture

On the topic of culture, two findings can be identified. First of all, it was found that the business climate is more closed and regulated in Japan compared to the more open European market, contradicting the third hypothesis. Furthermore, it was expressed that the companies from the American market mainly feel pressure from their shareholders, whereas European companies do mainly from their customers.

Communication

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chemical suppliers talk to OEMs directly. Although there is value in knowledge being exchanged amongst all parties, the paint manufacturers will try to avoid this from happening, in an attempt to preserve their bargaining power.

Strategic Path Effectiveness

Considering the findings of this research, the proposed main research question: ‘What is the most effective strategic path for the global specialty chemical industry, in order to reach innovation in the automotive industry?’ cannot be answered with a single answer, since it depends on a number of factors. For small firms, partnerships should be used in combination with internal R&D, in order to maximize the innovation output with limited resources. For large firms, it is more context-dependent. Under normal market conditions, and when speed is not crucial, the combination of internal

R&D and Partnerships is an effective and low risk path, with the accompanied benefit

of keeping the projects hidden from the competition. In the face of a technological change however, and when speed plays a crucial factor, internal R&D is best combined with vertical integration, despite the risk involved. This last finding is in line with the first hypothesis, and with the visible differences in the effectiveness of the paths for small and large firms; the second hypothesis proposed in this research is also supported.

For companies active in the specialty chemical industry, which reported total sales of $500 billion dollar in 2013, these findings provide insight into how their budget can be more effectively allocated when investments in innovation are made. As an

illustration, this research stated the current case of BASF introducing an innovation in the paint process used in the automotive industry, through a paint reducing the coating steps from four to three, saving time, energy and money. BASF’s competitors in this market cannot ignore this direction in which their market is going and should assess their situation critically. According to the findings of this research, these firms can be recommended to prioritize their investments into internal R&D coupled with vertical integration, in order to catch up with the competition. In addition to this

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LIMITATIONS

Since the effectiveness of the strategic paths proved hard to measure with a questionnaire, due to the role of the specific context, no quantitative analysis was performed in this research. The qualitative analysis that has been performed is more subjective, and not as analytical as a quantitative analysis would have been. Although this has proven hard to perform for this specific topic, it would add additional validity to the research, and is both a limitation as well as a suggestion for further research. Another concern regards the sample used in the qualitative research. These interviews were conducted amongst a majority of the persons occupying a senior position, however not every person held a position at the top of the organizational hierarchy. Access to people in these positions is very difficult, especially as firm size increases, but since they have the most extensive knowledge and experience with strategic decision-making, an increase in ranking amongst the participants would increase the quality of the sample.

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SUGGESTIONS FOR FURTHER RESEARCH

As was elaborated upon in the limitations section, it is suggested that for further research, the findings of this research are tested empirically, adding more validity to the conclusions drawn. Furthermore, the strategic paths can be analyzed individually, in order to achieve a more in-depth perspective. An example of this is a research asking: what types of partnership are most effective, and in what situation? In addition to this, the provided framework can be used to analyze other industries as well, allowing for the findings to be compared amongst different industries, allowing for new insights on the strategic paths and their effectiveness to emerge.

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APPENDICES

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‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION

IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

‘THE EFFECTIVENESS OF STRATEGIC PATHS TO INNOVATION

IN THE GLOBAL SPECIALTY CHEMICAL INDUSTRY.’

ABSTRACT

TABLE OF CONTENTS

INTRODUCTION

LITERATURE REVIEW

METHODOLOGY

DATA ANALYSIS

customers

partnerships

CONCLUSIONS

LIMITATIONS

SUGGESTIONS FOR FURTHER RESEARCH

REFERENCES

APPENDICES