Innovation in Gulf Petrochemical and Chemical Companies
Views on Innovation – today and tomorrow
CEOs and other top executives in the Gulf petrochemical and chemic al industry acknowledge that innovation will play an important role in their companies. Intensifying competition and expansion in the scope of products and the geography requires the Gulf chemical players to drive innovation to unleash their employees’ potential in the new competitive landscape. However, on their way to a more innovative culture, they have identified insufficient access to qualified human resources and inadequate innovation infrastructure as the main hurdles to innovation for the chemical industry in the Gulf region. In the future, innovation is said to top the agenda of the Gulf petrochemical and chemical companies, with strong focus on product and process innovation. The executives share the view that the most effective measure to strengthen innovation in their organization is to implement an innovation strategy.
to satisfy. Chemical companies need to understand customer needs much better and faster to outperform competition. The need to address sustainability targets related to pollution, global warming and resource scarcity has also imposed greater pressure on the chemical industry to produce products in a more environmentally friendly and efficient way. Since the advent of the petrochemical and chemical industry in the Gulf region in the 1980s, the fledgling industry has demonstrated a stunning compound annual growth rate of more than 12 per cent.² With benefits from feedstock advantages still prevailing but not being carved in stone forever for all projects, the Gulf petrochemical and chemical companies will have to prepare for fiercer international competition with the respective need to diversify their production coming from base chemicals into more value-driven products downstream. How do executives in the Gulf petrochemical and chemical industry perceive the role innovation can play in this context? Do they consider innovation as a powerful means to combat their challenges? How do they plan to power innovation in their organization? 85 per cent of managers in the major Gulf petrochemical and chemical companies consider innovation as one of the most important factors for their companies With these questions in mind, supported by Stratley, GPCA conducted an innovation survey in November/December last year for the Gulf chemical industry. More than 20 major Gulf petrochemical and chemical companies participated in the survey, mainly with direct and insightful feedback from CEOs. The innovation survey suggests that a vast majority of the companies consider innovation to be imperative to keep them competitive in the market. As important as it may be perceived, the current innovation status and accomplishment is yet to reach a higher phase: even though establishing a proper innovation strategy is perceived most critical to developing a deeply rooted innovation culture, most companies do not have a concrete innovation strategy in place with only few exceptions. The corporate executives also raised the possible reasons which might well hinder innovation in the Gulf petrochemical and chemical industry, such as insufficient access to talent and inadequate innovation infrastructure. Furthermore, only a few companies generate patents in the region, which indicates that Gulf petrochemical companies have a long way to go to achieve measurable innovation. In addition, the com monly shared view is that innovation in the Gulf petrochemical and chemical industry will mainly focus on product and process improvement.
It is the innovation in new products, technologies, approaches and concepts which steered the advancement of the well-being of society. Although innovation in the chemical industry may not seem as visible as innovation in industries closer to consumers, innovators in the chemical industry have transformed almost every aspect of modern life. When it comes to innovation in the chemical industry, it is largely technological advancements being referred to, such as synthetic rubber found in modern car tyres or affordable drugs that greatly prolong life expectancies or increase life quality. For the purpose of this study, however, a broader definition of “innovation” is applied, also used by the OECD, which defines innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations” (it is a continuous process that involves multiple aspects of firm activities).¹ “Innovation is the fuel of corporate longevity. It endows resources with a new capacity to create wealth” Peter Drucker
¹ OECD, 2005 The Measurement of Scientific and Technological Activities: Guidelines for Collecting and Interpreting Innovation Data: Oslo Manual, Third Edition ² Source GPCA
The emergence of new global economic trends and the development of the chemical sector in terms of industry life cycle require companies in the chemical industry to adopt innovative solutions to solve problems in the new competitive landscape. Firstly, globalization has involved almost every chemical company in the global value chain, which offers lavish opportunities as well as increasing competition. In this context, innovation acts as a catalyst to trigger the potential of human capital and to integrate resources in a company to deliver superior products and services. Secondly, today’s customers are better informed and harder
4
5
Awareness of innovation with limited action plan in place It has been the main focus for the Gulf petrochemical and chemical industry to build up world-scale assets in record time in order to benefit from gas cracking and related feedstock advantages. However, our study shows that the importance of innovation has been escalated on the agenda. As far as current perception regarding innovation is concerned, 65 per cent of the executives say that innovation is among the top three priorities for them. An additional 20 per cent have even identified innovation as the single most important priority for their companies. The importance of innovation will remain high in the future, with 85 per cent of executives considering innovation as being among the top three priorities for their companies in the next ten years to come (Figure 1). It is noteworthy that there is a disparity between the perception and the status of actions taken to match the perception. Notwithstanding the acknowledgement that innovation is a crucial part of the company strategy in maintaining competitiveness in the market, a long way and significant room for improvement is ahead. When asked whether the companies already have an innovation strategy in place, a significant majority of 85 per cent confirms that they are either contemplating an innovation strategy or already have one in place. Nevertheless, only a quarter of the respondents have developed a conscious innovation strategy, half of which have not been implemented yet (Figure 2).
figure 2 Only a few companies have an innovation strategy in place Source: GPCA Innovation Study 2011
Does your company currently have an innovation strategy? 5
Absolutely
12
We seriously consider this 4
No more than an idea yet 3
No 0
No need for us
figure 1   If so, is it implemented?
Innovation is and will remain important Source: GPCA Innovation Study 2011
How important is innovation to your company at present? 4
Most important
5 13
Among my top three priorities
12
3
Somewhat important Not important at all
In ten years, how important will innovation be to your company?
0
2
2
3
Early implementation stage
0
1
6
7
Almost
Yes
Obstacles to innovation: access to human resources and infrastructure If the companies already regard innovation as a top priority on the strategic level, what are the hurdles they face in making bold moves towards innovation? A lack of innovation culture in a company was identified as a counterproductive factor against innovation efforts. Among the obstacles to creating an innovation culture, limited availability of competent human resources in the Gulf region has topped the list, with 13 votes out of 20. This impression is firmed up by the secondly rated obstacle which is low quality in national educational systems. A systemic lack of qualified talent in the region turns out to be a serious headache for executives in the Gulf region. Furthermore, the corporate culture itself was also identified as an obstacle to creating an innovation culture (Figure 3). Managers also shared the view that innovation infrastructure, such as innovation centres and educational institutions, is not fully supportive in driving innovation. 75 per cent of the companies rate the quality of innovation infrastructure as low or rather low (Figure 4). Apart from the quality of the infrastructure, the quantity of innovation and patent generation also indicates the relatively low momentum in innovation activities in the Gulf chemical industry. Merely one third of the surveyed companies operate a total of ten innovation centres in the Gulf region, while the remaining two thirds do not run any innovation facilities at all. Less than a quarter of the respondents generated approved patents at these facilities (Figure 5).
figure 4 Quality of infrastructure is rated low Source: GPCA Innovation Study 2011
How do you rate the quality of infrastructure/institutions in the Middle East to successfully drive innovation?
Very high
1 4
Rather high
7
Rather low 6
Low
figure 5
figure 3  
Limited momentum in R&D activities and patent generation
Obstacles to innovation: human resource & quality of educational system
Source: GPCA Innovation Survey 2011
Source: GPCA Innovation Study 2011
How many innovation centres/facilities does your company maintain in the Middle East?
What are the obstacles when creating an innovation culture within your company? 13
Human resources competency 4
Low quality in national educational system 3
Limited financial budget
Culture
Operation stability Business maturity
4 10
0 No comment
3 1 1 1
8
9
4 No
3
1
2
No obstacles
LT nature, intangibility
2
How many patents have been generated at these facilities to date?
3
15 Yes
Implementing an innovation strategy in alignment with the business strategy
Innovation: all about products or much more? When the managers were asked to indicate the current importance of respective innovation activities in percentages, they said innovation in products accounts for 37 per cent of all current innovation activities, which will increase slightly to 39 per cent in the future. The next important area for innovation is in processes, which accounts for 28 per cent of current innovation activities and will increase slightly in the future to 31 per cent. Apart from products and processes, innovation potentials in organization and marketing are assigned similar importance currently, while innovation in organization is deemed to have less potential in the future (Figure 7). In particular the allocation of high importance to innovation in products did not come as a surprise, as products are the fundamental carrier of a company’s value proposition and subject to direct feedback from and interaction with the customer. However, it is also to be noted that radical product innovation in the chemical industry shows a diminishing trend as a whole. If we take a closer look at the brief history of product innovation in the chemical industry, it can be depicted with a bell curve. For 30 years, monomer innovation has declined substantially and cannot be seen as a realistic sustainable lever to differentiate itself in the market. In other words, taking an industry life cycle point of view, the chemical industry has evolved from its fledgling and booming stage into its current mature phase, in which incremental product innovation by far outweighs radical product innovation. Moreover, at this stage, chemical producers face fierce competition among peers as well as increasing bargaining powers from upstream and downstream players, which will urge chemical producers to take any available measure to operate all aspects of the business more efficiently. The focus on product innovation by Gulf petrochemical and chemical companies is undoubtedly legitimate, as they are still on the course of building up product portfolios downstream. Nevertheless, the declining radical product innovation in the global context in
An innovation strategy leads to a platform which guides the allocation of resources in an organization for various activities to achieve innovation targets and thereby create value and competitive advantages. A well-formulated and effectively implemented innovation strategy that is in line with a company’s business strategy can serve as a powerful means within the organization to increase innovation achievements. The managers confirmed this understanding in the innovation survey. Concerning the effective measures to strengthen future innovation in a company, implementing an innovation strategy was given an overwhelming significance by the executives. “Intensifying the collaboration with international institutions” and “establishing own research centres in the Gulf region” followed in the list. Interestingly, the traditional short cuts to innovation deployed by some other emerging countries and regions (e.g. China), such as acquisitions and joint ventures, have been rated with low importance. This might partly reflect the general target to develop the domestic economy in order to fulfil the national responsibility to create jobs instead of just owning a know-how advantage with no effect on the domestic economic structure. Although financial inputs into innovation are also an indicator of innovation activities, most respondents do not consider simply increasing innovation budgets as a meaningful way to strengthen innovation. What is worth mentioning is that “Collaborating with customers” was rated with rather low priority, following “Acquisitions”. This could be attributed to the fact that the product portfolios of the Gulf chemical players still comprise mainly commodity products which require relatively low customer interaction. However, we foresee that more customer-oriented innovation will gain popularity in the future, as a consequence of downstream integration of the Gulf chemical companies and development of more “tailor-made” products (Figure 6).
figure 6
figure 7
Implementing an innovation strategy is the key to strengthening innovation
Implementing an innovation strategy is the key to strengthening innovation
Source: GPCA Innovation Study 2011
Source: GPCA Innovation Study 2011
Please rank the three best ways to strengthen innovation in your company (1–3, with 1 being best) 36
Implement an innovation strategy 22
Collaborate with international institutes 20
Establish research centre(s) in the Gulf 17
Acquisitions Collaborate with customers Joint ventures
11
Process
11
Organization Marketing
3 10
11
Please describe in % where you see the biggest potential for innovation in your company in the next ten years: innovations in
37
Products
7
Increase innovation budget Collaborate with GCC companies
Please describe in % the current importance of the respective innovation activities for your company: innovations in
39
28 18 17
31 12 18
line with the need to outperform other early entrants in terms of efficiency requires the Middle Eastern players to take supplementary measures to optimize innovation results, such as shifting part of innovation efforts to other activities of the value chain. It might seem somewhat negative and pessimistic to arrive at this conclusion, though it is still important to acknowledge the trend and take actions accordingly. When product innovation becomes increasingly challenging, what are the best ways to leverage the existing resources to achieve results through innovation efforts? As the OECD defines (Figure 8), innovation is to be seen as a facilitator that connects various parts of company activities. This fully reflects our experience and our attitude to how innovation should be viewed and used in pursuing overall company targets. Product development may always be a natural addressee for innovation means, by the same token, the awareness that all other activities in a chemical company can also be optimized through innovative measures resulting from effective holistic innovative management will have to develop over time. That being addressed, what areas other than products could be looked at? To get an idea for the Gulf petrochemical and chemical companies, we asked leading executives how they assess the importance of different competencies for the overall success of their companies: to achieve optimal results out of innovation efforts, it is important to identify critical competency areas for the organization so that innovation efforts can be allocated to such areas. As a result for the Gulf region, more than half of the company executives consider marketing & sales as the top critical factor to the success of their companies. Supply chain competency has been rated slightly lower as the second most important factor to success. R&D competency is rated as the third most important factor for the companies. This survey has revealed insights concerning the innovation status in the petrochemical and chemical industry in the Gulf region. Driving Innovation in the industry is no doubt on the agenda already. The question remains when this awareness will be put into clear action and which measures will be chosen to drive innovation forward. The survey suggests that the Gulf chemical companies relate innovation primarily with products and processes hence leaving significant potential in the event that this view will be broadened to reach also other key competencies. In that moment the challenges of talent scarcity will become even greater.
figure 8 OECD innovation model
Hence HR development as well as sourcing should be high on the agenda as soon as possible. GPCA is planning to conduct a series of innovation studies in the upcoming years to follow up the progress of the industry in this matter. As the global financial situation shows instability, particularly since the second quarter of this year, the prospect of the macroeconomic situation in the next years and the demand situation in the chemical industry is clouded with uncertainty. While other major global chemical players are preparing for a possible downturn, Middle Eastern counterparts could seize the opportunities arising, such as gaining access to highly qualified talent pools in other regions, thereby acquiring competency to revamp their organization to an innovative culture. During downturns, companies mostly shift their focus to cost-cutting measures to realize bottom-line optimization, which in most cases results in a temporary cessation of innovation investments. How would the Gulf petrochemical and chemical companies prioritize innovation in this situation? As mentioned earlier, innovation could happen anywhere in the organization, be it an innovative idea to provide new products and services, an innovative marketing solution for an existing product or even an innovative cost-cutting approach in the supply chain management. Answers to the above questions still remain to be seen in our next upcoming innovation studies. We believe the innovation survey will not only enable the company executives to have a benchmark against their peers in the region but will also serve as a reference in terms of in novation status to various stakeholders in the Gulf petrochemical and chemical industry.
figure 9 Competencies in marketing & sales are the most important to success Source: GPCA Innovation Study 2011
Please rank the importance of the following competencies for your company’s success in the next ten years (1– 8, with 1 being most important)
Source: OECD; Michael Porter value chain analysis, Stratley analysis
Innovation Inbound logistics
Operation
Marketing&sales
Services
5 6
13
No. 3
Supply chain R&D Procurement/sourcing Recruiting Corporate portfolio Finance 0
12
No. 2
Marketing/sales
Finance
Corporate portfolio management
Recruiting
Procurement/ sourcing (feed)
1 2 3 4
External relations
R&D
Workplace organization
Supply chain management
Business practice
Marketing/sales
No. 1
2
4
6
8
10
12
Acknowledgement We would like to thank all the companies that have participated in the survey. Without the valuable input from high-level executives in the Gulf petrochemical and chemical industry, this survey would not have been able to be carried out successfully. Thank you! Disclaimer The sample of the survey comprises the leading petrochemical and chemical companies from all GCC countries. More than 75 % of the participants were either President, CEO or both of their companies. The remaining participants were high-level executives with direct responsibility for innovation in their companies. Hence the survey reflects a rather complete picture of executives’ view of innovation in the segment of leading Gulf petrochemical and chemical companies. However, beyond this, i.e. small and medium-sized chemical companies in the Gulf region, the results of this survey cannot automatically be applied. About Stratley Stratley is a leading advisor for the global chemical industry. Offices are located in Cologne, Hamburg, Dubai and Shanghai. With its presence in the UAE, Stratley aims to reach the leading Arab and foreign companies as well as authorities potentially participating in the region’s future development. Our advisory activities include work at group and business unit level as well as for in-house services. At group level, we help to develop corporate strategies, e.g. in order to identify new investment options or acquisition targets. Further areas are definition and implementation of companies’ organizations to position them well them for future opportunities. At business unit level, company-specific marketing and sales strategies are one focus area, the definition of successful product portfolios another. In its Dubai office, Stratley works with an international team combining first-class chemistry expertise, strategic know-how and intercultural competency. About The Gulf Petrochemicals and Chemicals Association The Gulf Petrochemicals and Chemicals Association (GPCA) is a dedicated and non-profit making association serving all its members with a variety of data, technical assistance and resources required by the petrochemicals and chemicals industry. GPCA’s mission is singular and specific in that it intends to support the growth and sustainable development of the petrochemical and chemical industries in the Gulf in partnership with its members and stakeholders and be both a sounding board and a meeting point for debate and discussion. It is the first such association to represent the interests of the industry in the Middle East and it has brought a major dimension to its task by creating both a forum for discussion and a place where likeminded people can meet and share concepts and ideas. Since its inception in March 2006, the GPCA has earned the enviable reputation for steering the regional industry towards a whole new level of co-operation and raising the standard in terms of common ground interests. Additional information is available at www.gpca.org.ae
authors Oliver Gawad Partner at Stratley, based at the Dubai office o.gawad@stratley.com Sven Fischer Project Manager at Stratley, based at the Dubai office s.fischer@stratley.com All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Gulf Petrochemicals and Chemicals Association or Stratley AG. © 2011 by Gulf Petrochemicals and Chemicals Association and Stratley AG.
Xiangmei Cui Business Analyst at Stratley, based at the Cologne office x.cui@stratley.com 14