PROFESSIONAL DEVELOPMENT PROFESSIONAL DEVELOPMENT

PROFESSIONAL DEVELOPMENT SAMPLER

INDEX 03

Leadership by Engineers and Scientists: Professional Skills needed to Succeed in a Changing World Dennis W. Hess CHAPTER 4: Time Management

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Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry Jens Leker, Carsten Gelhard, and Stefan von Delft CHAPTER 1: Management Challenges in the Chemical and Pharmaceutical Industry by Jens Leker and Hannes Utikal

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4 Time Management The essence of self‐discipline is to do the important thing rather than the urgent thing. Barry Werner I am definitely going to take a course on time management … just as soon as I can work it into my schedule. Louis E. Boone How did it get so late so soon?

Dr. Seuss

Engineers and scientists generally approach problems and decisions by developing an understanding of all pertinent issues. Deadlines may not be of particular interest to them because solving problems is where their gratification lies. Because they are highly motivated, engaged, and accomplished, engineers and scientists seek and accept numerous challenges and invitations to undertake new projects and responsibilities. Although such opportunities are flattering and intellectually stimulating, 24 h/day availability remains the prevailing boundary condition. As a result, engineers and scientists sometimes commit “professional suicide” because the commitments made become overwhelming and nearly impossible to satisfy even if sleep is eliminated. A natural consequence of this situation is the generation of stress, anxiety, frustration, and perhaps compromised mental and physical health, all of which negatively impact performance and quality of life. Time management is therefore imperative. Of course, no one should accept all the opportunities that they encounter or find attractive, but we will say more about that later. Efficiency and effectiveness require that proper use be made of the fixed amount of time available. This is especially true of leaders who are Leadership by Engineers and Scientists: Professional Skills Needed to Succeed in a Changing World, First Edition. Dennis W. Hess. © 2018 American Institute of Chemical Engineers, Inc. Published 2018 by John Wiley & Sons, Inc.

4.1 Time AAlocaTlo

responsible for both their duties and oversight of duties assigned to the individuals who report to them. Despite the importance of time management to deal with multiple demands, many technical leaders give little thought to whether their time is spent addressing important issues or simply those that are urgent; still worse is the fact that leaders often neglect their own personal (and sometimes professional) needs in favor of work‐related duties. Numerous books, articles, and blogs have been written to describe time management techniques and strategies; a few of these are cited here [1–7]. In this chapter, factors that an effective leader must consider to manage his/her most limited resource – time – are discussed.

4.1 Time Allocation Leaders must first recognize how their time is spent and be willing to alter their behavior as needed. This statement may appear obvious, but most technically trained individuals have never tracked how they use the hours in their week because they enjoy the intense effort that they expend doing their job and their intent is to achieve the best technical result possible. Although this goal is laudable, the outcome significance is often not justified by the effort. Tracking the time spent on specific tasks every 30 min for 1 week will indicate where time is being spent productively and where it is being wasted. When equal or even more time is being spent on unimportant rather than important tasks, the need for prioritization will be clear. After time usage is determined, evaluation of the accomplishments during the week should be assessed. This exercise offers additional insight into personal achievement: The most productive time(s) in your day are identified. These times can be used to undertake particularly difficult or intense tasks as the workweek is planned. For instance, you may find that early morning or late afternoon/evening, when other distractions are minimal, is the best time for you to devote to more creative activities such as devising novel project directions or writing proposals, manuscripts, and reports. Covey [1] describes the need for prioritization in managing time. He breaks activities into those that are urgent, not urgent, important, and not important. This categorization and discussion in Ref. [1] has been used to formulate Table 4.1. When considering how our time is spent, the urgent and important activities must obviously be given priority, since these often determine the ability to accomplish tasks. That is, if equipment is nonfunctioning, facilities (e.g. cooling water, ventilation) are compromised; if a deadline is looming or a presentation is required within the next 24 h, these must receive attention immediately. However,

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Table 4.1 Generic activity types, examples, and anticipated consequences of each when managing time.

Activity type

Examples

Consequences of focusing on this activity type

Urgent and important

Crises, deadlines, process or product problems

Crisis management, stress, burnout

Urgent and not important

Interruptions (e.g. visitors), some emails or phone calls, some meetings

Lack of discipline, irresponsible if devote considerable time

Not urgent and not important

Websurfing, hallway conversations, some emails and phone calls

Lack of discipline, irresponsible

Not urgent and important

Relationship building, vision generation, planning, goal setting, strategy formulation

Discipline, control, perspective, decreased number of crises

Source: Adapted from Covey [1].

effective leadership will be inhibited if urgent and important activities consume the majority of the available time. This is leadership/management by crisis, and indicates that adequate planning (e.g. maintenance, repair, problem anticipation, deadline planning) was absent. Such approaches to time management lead to demoralization, high stress, anxiety, and ultimately burnout for both the leader and the subordinates. That is, when operating in crisis leadership mode, a leader typically requests immediate responses and accomplishments from those reporting to him/her, requiring the subordinates to disregard the tasks that they have been assigned, to generate or supply information to the leader. Equally problematic is the fact that strategic efforts such as goal and vision development may have been ignored to make time to deal with crises, a tactic that can lead to disaster personally and professionally. Certain activities are not particularly important, but require urgency. Some interruptions (e.g. phone calls, unscheduled visitors or meetings) are necessary as are immediate responses to some emails. The primary consideration is ensuring that despite the urgency, these activities do not become time consuming, thereby resulting in a feeling of frustration and lack of control. That is, these are short‐term issues and extensive engagement with them is closely related to the crisis leadership mode described under activities that are urgent and important. Activities that are not important and not urgent are often responsible for significant wasted time. Since many of the specific activities in this category (e.g. surfing the web, hallway conversations, phone calls or

4.1 Time AAlocaTlo

emails1 with a friend or colleague) are interesting and pleasant, substantial time investment (distractions) can occur readily with the justification that these fall within expanding leader interactions with and courtesy to others. While these activities can indeed be worthwhile and courtesy to others is essential, our tendency is to spend an inordinate amount of time on them because they are enjoyable and a break from our routine and perhaps less‐pleasant tasks. When a sizable fraction of our available productive time is spent on these activities, overall productivity suffers and places more urgent activities in crisis mode because time has been squandered. The criticality of controlling the time we spend on activities such as email has been enhanced by the extreme and constant “connectiveness” we experience with such current technologies. In particular, the availability of being connected seems to suggest that we should be continually connected. Operation in this mode leads quickly to an inability to unwind and relax, which generates enhanced stress and a feeling of frustration. These devices have on/off capabilities that should be used on a regular basis. A balance of productive versus less‐productive time is required, which demands prioritization, decisions, and careful planning. Particular times during the day should be made available for email responses and social interactions so that they do not consume large parts of the day but are an active and important part of your schedule. This plan offers the advantage of a short break or “refresh” from intense effort that requires high levels of concentration and extensive time. Such planning efforts require that we establish and implement good habits that reflect a recognition of the distinction between important and unimportant tasks and employ the self‐awareness and self‐control necessary to adhere to these priorities. As Covey stresses, activities that are not urgent but important should be the focus of our efforts, with time allotted for the other three types of activities. Items that are important but not urgent constitute the strategic aspects of an effective leader’s time allocation; these efforts include planning, anticipating potential obstacles, goal‐setting, and relationship development. Since the payback for these endeavors is typically long‐term, they often receive inadequate focus. Because goals, vision, and personal interactions represent the future success (or failure) of individuals as well as organizations, considerable energy should be placed on activities that promote or define these efforts. Specific time(s) each week should be allocated to these activities so that the limited time available is not taken up by the urgent items that belong in the not important task category. 1 Electronic communication has evolved rapidly and will continue to evolve. In this book I will use “email” as a convenient label for essentially all non‐face‐to‐face communication.

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Followers seek leaders who have a clearly articulated vision, display the perseverance to pursue that vision, and engage others to obtain their input and support. Covey labels this general process “begin with the end in mind,” and devotes extensive discussion to the topic [8]. Furthermore, the objectives desired must encompass both professional and personal goals. Unless our goals and priorities are considered carefully, and a reasoned plan established, we may simply undertake a “random walk” with much effort expended, but little to no progress toward desired objectives. That is, someone can work hard and be busy (e.g. taking data, holding meetings, reading broadly) but not accomplish anything useful or obtain significant results. When this happens, the focus is likely on the activities themselves rather than on strategic objectives and goals. Technically trained individuals are particularly prone to this scenario, since they are driven to better understand the problem they are addressing; more data, more calculations, more model formulation is always better. Since these tasks are tangible and often more familiar to the technical leader, long‐term planning and strategic goal‐setting is delayed or ignored. It is particularly important that a leader guard against putting his/her employees in this situation with specific requests. For instance, to compensate for their hesitation to make a decision without all the facts, technical leaders sometimes call too many meetings and require or perform too much analysis (“analysis paralysis”) resulting in insufficient action that inhibits progress toward the goal.

4.2

Planning and Organization

Planning is a critical exercise to optimize time use. As noted by Winston Churchill, No one ever plans to fail, they just fail to plan. Leaders especially need to plan and use time effectively and efficiently to further develop their capabilities, skill sets, and achievements. In addition, they should facilitate maximum productivity and accomplishments of those reporting to them. Crisis leadership as deadlines approach or due to spontaneous and unexplained changes in direction on a regular basis leads to frustration, dissatisfaction, and confusion on the part of those performing the work. A variety of planning tools are available, including to‐do lists, calendars (hard copy or electronic), charts, and electronic planners; the latter allows priorities and deadlines to be set and easily accessed. The planning method selected should be determined by answering a simple question: Which of these will I actually use to make my life and the lives of those around me, better?

4.2 AcooTog cond OgcoTicaTlo

Although planning in professional and personal venues is essential for technical leaders and followers, before discussing the implementation of plans, a caveat must be offered regarding realistic expectations with respect to these plans. All engineers and scientists have (hopefully) made detailed plans for their career and life. As with any tangible technical problem to be solved, these plans include a number of assumptions. Specifically, we assume that the opportunities that we desire will be available to us. Our expectation is that we simply need to search and ultimately identify these opportunities; if we are properly prepared, everything will fall into place. Unfortunately, this is generally a poor assumption. Like most events in life, we have absolutely no control over the opportunities that present themselves to us at any given time. Irrespective of how well‐ prepared we are for a certain type of position, if that opportunity is unavailable, we are unlikely to be able to create the position merely because we have the necessary background and expertise. The exception to this statement is entrepreneurial activities, but even in this case, the timing must be right to attract the necessary funding and realize the appropriate market demand. Recognition of this limitation is not meant to be discouraging, but rather realistic and forward‐looking. That is, at all times, we should embrace continuous learning, improve technical competencies within and outside our focus areas, develop additional skill sets needed for our “ideal” position, and network at every occasion. When a new attractive opportunity does appear, whether or not it was initially sought, we will be prepared to undertake this new challenge with a positive attitude and approach. After priorities and plans have been established and a time management structure put in place, the tasks must be accomplished. This requires that the leader decide how this will occur. Many new technical leaders rely solely on themselves for accomplishment since they are capable, driven, and agree with Charles‐Guillaume Étienne: If you want something done right, do it yourself. Time restrictions preclude this approach as new leaders soon learn. To avoid wasting time, leaders should first make a decision regarding whether the task should be performed. If not, then inform the requester that this is not appropriate/necessary, that the time frame requested is not reasonable, or that it is not best accomplished by you or your team; of course, justification will be needed. New technical leaders often feel that they should accept every task request they receive, even if they are not the best individual to assume this responsibility. Sometimes it is best to decline the opportunity, especially if completion of the task within the time frame needed is not possible without obviating other duties. If you

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are not given the choice to decline, then reprioritization of the existing obligations may be needed. If the task is to be completed, then either you perform the task or delegate it. Procrastination in undertaking or completing a task clearly inhibits progress and achievement and frequently increases stress level because we know that the tasks must be addressed. Why do we then delay performing a number of duties or assignments? This response may result from the individual (i) feeling overwhelmed by the effort that will be required, (ii) considering the task to be uninteresting or unnecessary, (iii) lacking the expertise to undertake the task, or (iv) recognizing that the task is difficult and the approach has flaws that may result in failure. These thoughts instill doubt and fear and cause us to abdicate our personal responsibilities. One way to move past this blockade is to devote or schedule a fixed (perhaps short) amount of time to get the task underway. Once the project has been initiated, the directions and path forward often become less onerous and threatening and smaller steps can be invoked to advance the effort. Confidence in our ability to perform the task is thus enhanced and the habit of procrastination broken. Another way to address procrastination is to step back from the task or problem to consider what part it plays in your overall goals and responsibilities. Placing the task in context can supply sufficient motivation to move forward. Such approaches involve managing our choices; rather than avoid the undertaking of a task, we proactively budget time to undertake and ultimately complete it and recognize its importance in the bigger picture. Irrespective of how procrastination is overcome, effective leaders quickly move the decision process to the point of either completion by himself/ herself within a defined time frame, or assignment to someone else with clear instructions regarding the time frame and task purpose. Technically trained leaders frequently have difficulty accurately estimating the time required to complete a task. The incorrect estimate can take one of two forms. Since they often feel that they understand the fundamental details of the problems to be solved and therefore how to solve the problem, technical individuals underestimate the time required. When their assumptions regarding the details prove incorrect, alternative approaches are implemented, leading to a prolonged time frame. Because technically trained individuals like to generate data, models, and understanding, they prefer to investigate technical problems extensively, exploring every main avenue and even side roads due to their interest in the nature of the situations being studied. Such attitudes can lead to an overestimation of the time required to ensure complete investigation of the possibilities. Experience is often the best teacher in overcoming these limitations, although a trusted mentor or advisor can also offer assistance.

4.2 AcooTog cond OgcoTicaTlo

With numerous duties on their plate, leaders undertake multitasking. Although this concept appears to be something that is quite obvious to and expected from a successful leader, multitasking can be detrimental. Clearly, progress must be made on several projects simultaneously. The effective leader learns quickly that if all projects are given equal priority, then all projects move slowly and may only reach completion asymptotically. It is usually best to maintain primary focus and concentration on one project to ensure completion in a suitable time frame. Although attention must be given to multiple tasks, too many projects underway simultaneously increases the stress level. In addition, frequent switching between projects can waste considerable time due to the need to reorient and recall previous efforts at each switch point. Completion of specific tasks in a timely manner while maintaining (limited) progress on others is accomplished by setting appropriate priorities and managing time effectively. This can be achieved by budgeting suitable time for each project and conscientiously adhering to the schedule. Self‐discipline is critical for effective time management and completion of individual projects. However, being involved in multiple projects and activities does have a positive effect on the level of creativity displayed. Synergy and variety of effort increases the probability that novel solutions to several of these problems are realized. Sometimes this is labeled serendipity, but recognition of relationships among different fields or problems and alternative ways of viewing situations arise because of the large amount of information being processed. More details regarding creativity will be discussed in Chapter 6. Another activity that can be considered both good and bad insofar as time allocation is concerned is collaboration [9, 10]. Shared leadership implies collaboration, close interaction, and interdependence to obtain and evaluate a variety of ideas, input, and concerns. Involvement of numerous individuals is required to achieve well‐defined, detailed goals and objectives and in the formulation of viable approaches to achieve these goals. Some organizations have promoted such efforts by designing buildings and office space in such a way to ensure “chance” meetings and spontaneous discussions. For example, Mervin Kelly was initially a researcher and ultimately Chairman of the Board at AT&T Bell Labs. He assisted in the design of the research facility at Murray Hill, NJ, where eight researchers won Nobel Prizes. The building was designed with many long hallways that virtually guaranteed meetings with colleagues who were addressing related or unrelated problems, thereby promoting interaction/innovation [11]. Sadly, the AT&T Bell Laboratories described above is no longer in existence; however, their legacy offers insight into how to promote interaction among engineers and scientists.

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In addition to architectural designs to promote collaboration, seemingly endless numbers of meetings are scheduled to bring together stakeholders with different backgrounds and experiences in particular focus areas for brainstorming sessions. How can such activities be deleterious? Productivity decreases if a significant amount of time is spent talking about and debating tasks/decisions with few if any concrete outcomes, because these efforts take time away from actually performing tasks. This is an example of ineffective time management. When too many individuals are involved in the decision‐making process, the process slows substantially because attempts are typically made to placate everyone’s major and minor concerns irrespective of whether these are critical to proper resolution of the issue. Priorities must be set and the leader must keep the group focused on the outcome so that important issues receive the emphasis, but less critical issues are recognized. Furthermore, there are some activities that are best carried out individually (e.g. detailed formulation and evaluation of a new process, calculations to estimate throughput, process modeling). High performers are always in demand; their attendance is therefore requested at an extensive array of meetings, which takes time away from other activities and productivity. This can be a particular concern for younger group members/recent graduates who may be reluctant to say no to such requests. A quote that I find useful in this regard, although it is from an unknown source is: I can only please one person each day; today is not your day and tomorrow doesn’t look good either. Underrepresented minorities and women are often overloaded with committee and meeting requests because they can offer diverse views and approaches. A servant leader will ensure that committee assignments and meeting requests/contributions are distributed among team members to minimize overburdening any individual while soliciting full participation and input into the various team functions. The leader must be sensitive to and aware of members who feel overwhelmed and whose accomplishments are suffering due to extensive collaborative efforts. This activity must be considered part of their contribution to enhancing the overall performance and goals of the team or organization. When needed, leaders should serve as mentors to assist others in evaluating which opportunities are worth their time and effort; decisions must be made with respect to how different opportunities might affect the team member’s professional and personal development while ensuring that significant contributions to colleagues, the team, and the organization are made.

4.4 SiicOr

4.3

Personal Time for Leaders

As mentioned previously, one of the more important items that leaders must consider in the realm of their time management, is finding time for the leader. During the quest to advance our careers, we often neglect establishing time for family, personal growth, and physical fitness. These activities fall in the somewhat urgent and definitely important category of activity types shown in Table 4.1. When attention to these items is lacking over long periods of time, leader development is repressed and his/her physical, emotional, and relationship health deteriorates. Although it may appear that the closer we get to 24/7 dedication to accomplishing work‐related tasks the more successful we will be; this is generally not true. Overemphasis on work‐related tasks can impede both personal and professional growth. Specifically, too high intensity for too long a period of time raises stress, generates fatigue, decreases efficiency, reduces overall job and personal satisfaction, can cause depression, and ultimately results in burnout. Short breaks from difficult and extended tasks to talk with colleagues or friends, spend more time with family, read a book on an unrelated topic, exercise, plan activities for personal growth, undertake a different task, or simply relax has an extremely positive effect on both physical and mental health. Sharing frustrations with mentors, colleagues, family members, and friends also lightens the load, often results in new ways of viewing or dealing with concerns, and improves personal interactions. When you leave the workplace, make certain that you unwind with family (including pets) and engage in other activities such as those listed above; working on a hobby; watching a play, theatre performance, or movie; or playing sports. These activities refresh your mind (and perhaps your body) and can improve your attitude, outlook, and motivation, especially when work‐related demands are high. Furthermore, as leaders advance and assume more responsibility, such considerations become more critical; it is thus crucial that the habit of scheduling time for personal pursuits be employed during all career stages.

4.4

Summary

Time is a limited quantity for everyone, including leaders. Effective and efficient use of this resource is mandatory if the leader is to be successful. Since leaders must perform their own tasks and are responsible for accomplishments of those reporting to them, it is critical that wasted time and ineffectual requests to others are minimized. Leaders must

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therefore know how their time is spent and especially ensure that urgent tasks are not given overriding emphasis. Important duties such as strategic planning, organizing, relationship‐building, and goal‐setting are often given limited emphasis since the outcomes are long‐term; yet, these are the activities that ultimately determine personal and professional success. Due to the myriad responsibilities assigned to leaders, they can easily devote 24/7 to these efforts, resulting in fatigue, burnout, and anxiety. Leaders must allocate time for themselves to renew, refresh, energize, exercise, and develop new (as well as strengthen current) professional and personal relationships. Dedication to these activities is crucial for continued effective leadership and physical/ mental health.

References 1 Covey, S.R. (2004). The 7 Habits of Highly Effective People. New York: 2 3 4

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Simon & Schuster. Habit 3. Allen, D. (2003). Getting Things Done: The Art of Stress‐Free Productivity. New York: Penguin Books. Kruse, K. (2015). 15 Secrets Successful People Know About Time Management. The Kruse Group, Amazon Digital Services. Chapman, S.W. and Rupured, M. 10 strategies for better time management. http://spock.fcs.uga.edu/ext/pubs/time_management (accessed 20 November 2017). Runyon, J. (2014). A beginners guide to Parkinson’s law: how to do more stuff by giving yourself less time. http://impossiblehq.com/parkinsons‐ law (accessed 20 November 2017). My Time Management. Eight timeless time management strategies. www.mytimemanagement.com/time‐management‐strategies.html (accessed 20 November 2017). LinkedIn. Eleven things ultra‐productive people do differently. www. linkedin.com/pulse/what‐ultra‐productive‐people‐do‐differently‐dr‐ travis‐bradberry (accessed 20 November 2017). Covey, S.R. (2004). The 7 Habits of Highly Effective People. New York: Simon & Schuster. Habit 2. Cross, R., Rebele, R., and Grant, A. (2016). Harvard Business Review (January–February), p. 74. Anonymous (2016). The collaboration curse. The Economist (23 January), p. 63. Gertner, J. (2012). True innovation. New York Times (26 February), p. SR1.

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1 Management Challenges in the Chemical and Pharmaceutical Industry Jens Leker 1 and Hannes Utikal 2 1 2

University of Münster, Department of Chemistry and Pharmacy Provadis School of International Management and Technology AG

For time and the world do not stand still. Change is the law of life. And those who look only to the past or the present are certain to miss the future. John F. Kennedy (1917–1963), 35th President of the United States of America The first chapter of this book outlines the specific characteristics of the chemical and pharmaceutical industry regarding, for example, products, site locations, competition, and research efforts. Additionally, the chapter summarizes results of a survey in the German chemical and pharmaceutical industry on business transformation processes and drivers of change that affect the industry. From these findings, management challenges and solutions to these problems will be derived.

1.1 Introducing the Chemical Industry as a Source of Innovation and Prosperity The chemical industry is one of the major global industries affecting all parts of human life. Advances in chemicals and pharmaceuticals have contributed to improving living conditions and particularly nutrition and health levels worldwide. Enhancements in the field of automobiles as well as new developments concerning battery electric or fuel cell vehicles have resulted, not least because of new materials and new formulations originating from the chemical industry. New electronic devices such as smartphones have only been possible due to a change of pace in the development of electronic materials and an increase in Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry, First Edition. Edited by Jens Leker, Carsten Gelhard, and Stephan von Delft. © 2018 John Wiley & Sons Ltd. Published 2018 by John Wiley & Sons Ltd.

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Business Chemistry

their purity. Continuous research for and production of active pharmaceutical ingredients (APIs) are of central importance for fighting (new) diseases and improving therapeutic methods. The chemical and pharmaceutical industry alters modern life through the transformation of scientific findings into marketable products. The invention and industrialization of production pathways such as the Haber(–Bosch) process for ammonia synthesis, the Fischer–Tropsch process to produce liquid hydrocarbons, or the contact process for producing sulfuric acid laid the foundations of the chemical industry. These processes acted as prerequisites for overall industry growth, technological change and wealth creation, whereby the underlying reaction pathways still apply today. Enormous advancements in technology in recent years have additionally enabled the sector to have an economically, ecologically, and socially positive impact on society in the future as well as today. In order to continue to achieve this goal, the chemical industry is reconsidering its modes of operation and finds itself in a phase of transformation [1]. From an economic perspective, the crucial role of the chemical industry for different customer value chains and the connection to nearly every end‐ consumer market is reflected by the impressive size of world chemicals sales in 2013 of €3156 billion and the average global growth rate slightly above the global gross domestic product (GDP) [2]. It has to be considered that this overall development is mainly driven by high growth rates in the Asian–Pacific region, eventually compensating for lower growth rates in Western countries. Asia has already become the largest market for chemicals, with now more than 50% of the global market. This share is very likely to increase even more due to the growing population in Asia and the declining demand in the West, especially in Europe. All these facets and volatilities make the chemical industry one of the most fascinating industries, not only from a scientific, technological or societal perspective, but also from a business point of view. In the following, we first characterize this highly interesting industry with regard to its specific characteristics and then subsequently highlight current managerial challenges relevant to the industry. In order to do so, we combine results from a literature review with findings from one of our own empirical studies on the management challenges in the chemical industry.

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

Management Challenges in the Chemical and Pharmaceutical Industry

1.2.1 Product and Process Characteristics The chemical industry is a process industry where firms “add value to materials by mixing, separating, forming, or chemical reactions” [4: 28]. Process industries differ from so‐called discrete industries with regard to the production process. In discrete industries, for example the automotive or engineering industry, production pathways converge as final products are assembled by using multiple discrete input components [5]. In contrast, a product in the chemical industry can simultaneously act as an intermediate, be processed further to synthesize other products, or serve as a finished, salable product. Production processes can therefore be convergent and divergent at the same time, resulting in an increased complexity for the planning and optimizing of such processes. In each process, components are mixed and react under well‐ defined physical conditions. In order to obtain high reaction yields, chemical companies rely on experience and knowledge from different fields, especially chemistry and engineering, and in some cases biology and biotechnology. Hence, the special nature of the highly complex processes sets the framework for all managerial decisions in the chemical industry. By adapting a value chain perspective, the chemical industry appears to convert organic and inorganic raw materials into value added products (see Figure 1.1). The upstream stages are closely linked to the petrochemical and exploration industry and are only manufacturing a few products, such as fertilizers or basic plastics originating from the Naphtha fraction of crude oil, and, in the case of inorganic materials, deriving from chlorine and salts. In the downstream steps, products of the upstream operations are further processed into a variety of products, which then enter various end markets. The customers of chemical companies are usually other firms who process the materials into end products, so that most relations are business‐to‐business (B2B) in nature. Within the chemicals value chain, the production processes vary. One can distinguish continuous, campaign, and batch production processes. Each process requires specific production assets, which tie up capital: ●

●

●

Continuous processes run on single‐purpose resources, steadily producing one product and not requiring regular changeover decisions. This type of process avoids downtime and scrap. However, flexibility in applying a different feedstock and input is limited as the production line is specialized for a certain product or process. Continuous processes can typically be found at the beginning of the chemicals value chain, involving petrochemicals, basis chemicals, and bulk polymers. Campaign production is related to multi‐purpose assets, so that different processes and products can run on the same production resource. Batch production is also related to multi‐purpose resources and, in addition, is suitable for steps implying a well‐defined start, throughput, and end production time as well as the ability to customize the huge amounts of the desired product. This is typically the case in the specialty chemicals segment [5].

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Business Chemistry

Oil & Gas

Petrochemicals

Basic chemicals

Polymers

Specialties Specialty chemicals

Olefins • Ethylene • Propylene • Butadien Product categories Polyolefins • PE • PP Industrial gases

Applications • Foils • Refrigerants

Active ingredients

• Additives Intermediates • Butanediol • THF • HMDA

Inorganics

Performance polymers

Fine chemicals

• Polycarbonate • ABS/SAN • PMMA

• Pharma intermediates • Vitamins • Flavors & fragrances

Performance chemicals

• Ammonia

• Pigments • Dispersions • Coatings

• Fertilizer

• Plastic bottles • Light stabilizer

• Coolants

• Plexiglass

• “Lotus effect” coating

Agrochemicals

• Herbicides • Food & nutrition

Abbreviations: PE: Polyethylene, PP: Polypropylene, THF: Tetrahydrofuran, HMDA: Hexamethylenediamine, ABS: Acrylonitrile butadiene styrene, SAN: Styrene acrylonitrile, PMMA: Polymethy methacrylate

Figure 1.1 Chemical products in the industry value chain

There are different approaches to classify products of the chemical industry. Kline (1976) [6] distinguishes between commodities and specialty/ fine chemicals. Following this categorization, commodities demonstrate a low degree of differentiation and a high production volume. They can be found in the early stages of the value chain and are manufactured by means of continuous production processes. These standard, high‐volume products with few variants are typically characterized by a low unit value and a low unit margin. Thus, the main buying criterion is the price. On the contrary, the specialty segments show a high degree of differentiation and a small production volume. Specialty chemicals are typically located at later stages in the value chain and are produced in batches. These products are often available in many variations and generate fairly high unit values and margins. Customers buy specialty chemicals due to their specific and unique product properties. The different segments of the chemical sector can furthermore be described by looking at the relative importance of additional key success factors, such as the intensity and contribution of research and development (R&D) to success, the relevance of distinctive knowledge about specific markets and customer


insights, and the importance of highly qualified personnel for the success of a business. These aspects are particularly decisive for the pharmaceutical and specialty chemicals segment, whereas the extent of investment in production facilities, the energy intensity of manufacturing, and an immediate access to raw materials significantly affect the success of commodity businesses. 1.2.2 Market Characteristics The chemical industry has been growing since its emergence in the 1860s. By encompassing all parts of modern life and creating new materials or new active ingredients for pharmaceuticals, the chemical industry has always been a trigger for innovation in its customer industries. The chemical industry has a share of 3 to 4% of the global GDP. The main markets are the European Union, the United States, and Asia, with Japan and China as central markets. While the growth rates of chemical consumption in mature economies such as Germany and the United States are similar to the rates of the respective national GDP, emerging economies, especially China, are demonstrating significant growth.1 Geographically, the chemical industry acts within at least three different markets. For a very limited number of products, companies produce the entire quantity of a product for the global market at one location. In this case, transportation costs must be negligible in view of the total cost position of a product and economies of scale. As a consequence, consolidation of the production in one plant is preferred over a global duplication of production activities. This is particularly valuable for producing APIs, where production processes typically have to be accredited. Nevertheless, regional production for the European, North American, and Asian markets is pursued for the majority of products. While there are limited trade flows between these main manufacturing regions, trading within the regions, for example within the European Union, is more intense. In addition to the global and regional markets, local markets can be identified, where products are only delivered around or even within one specific production facility. This can be observed in a so‐called Verbund production system, which is an integrated production where products are delivered directly, via pipes, to customers that are based on the same chemical park. Overall, the chemical industry occupies a multiregional role. With its different segments, the chemical industry provides significant profit earning potential. In rankings comparing the profitability of different industries, the pharmaceutical industry is often found among the top industries with an EBIT (earnings before interest and taxes) of about 20%. Other 1 Current figures on the industry’s development might be found, for example, at the websites of the European Chemical Industry Council (cefic), the American Chemical Association (ACS), or the German Chemical Industry Association (VCI).

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profitable industries included within this class are petroleum, tobaccos, or consumer foods. The chemical industry (without pharmaceuticals) ranks in the middle of the list of 16 sectors [7]. Other industries with a much higher visibility in the business news, such as electronics, telecommunications, or aviation, have much lower results. In the following, we will discuss reasons for this favorable profit position. First of all, companies active in the chemicals value chain provide value to their customers. Pharmaceutical firms produce highly differentiated products bought by price‐insensitive consumers and new products often benefit from their monopoly‐like position due to patent protection. The producers of specialty chemicals manufacture highly differentiated products as well, and can often charge high prices, as customers need these specific products and might even be able to generate a competitive advantage for their firm by buying them. On the other side, the price pressure is much higher for commodities where products are highly standardized, so that companies can only differentiate themselves from their competitors through product prices. However, it would be wrong to assume that only highly price‐differentiated companies can be profitable. In the chemical industry, those companies with an access to low‐ cost raw materials, low‐cost energy or a highly effective interlinked production can realize above-average profits in the field of commodities as well [8]. The intensity of competition, another main driver influencing industry profits, varies by segment and region. While the whole chemical industry is somewhat less consolidated than other industries, a higher degree of concentration can be observed at the segment level. This is, for instance, reflected by the top six manufacturers of crop protection products, who account for around 80% of this market [9]. In regional terms, the North American market shows the highest concentration, implying a rather oligopolistic market structure (with few players of similar size and power). Although Asian markets show lower degrees of concentration, profit-destroying price wars can be impeded due to the strong growth [10]. In addition to the number of players active in the sector, risks for the profitability of the chemical industry stem from its capital intensity and high barriers to exit the market. For instance, in times of an economic downturn, firms are not able to reduce their production volume gradually due to process requirements, especially in the case of continuous production processes. The resulting overcapacities eventually lead to deteriorating prices and, in turn, to deteriorating profits. Moreover, exit barriers such as lay‐off protection and environmental regulations, which primarily apply to European production sites, constitute high exit barriers. High market entry barriers, notably the major investments in production plants, R&D, and marketing, have mostly prevented new companies from entering the chemical industry in the past. Consequently, the industry is characterized by a specific set of companies, where mergers and acquisitions occur frequently but new players are rare [3, 11, 12].


The evolution of the chemicals industry can be explained by means of its underlying basic sciences [13]. Business historian Alfred Chandler finds that the success of companies in the chemical and pharmaceutical industry results from transferring findings from basic research into marketable products and using the profits and experience gained from each new generation of products to commercialize the next generation [3]. Such companies have yet to be aware of a future where science and technology essential to the continuing growth of high‐technology companies might stop being the engine for innovation and growth. The chemical industry, with its periods of research‐based growth between the 1880s and 1920s and again during the 1940s and 1950s, has to cope with the fact that since the 1950s, only a few major new developments have been created by chemical sciences or engineering [1, 14]. Incremental product and process developments have thus gained more importance for successful companies in the chemical industry than basic research (which is rather aimed at radical inventions). Also, the successful model of pharmaceutical companies developing new products based on basic research findings (blockbuster products) has stumbled lately. However, in spite of this, in the 1960s and 1970s, biology, as well as the related disciplines of microbiology, enzymology, and the beginnings of molecular biology, contributed to the generation of new pharma products. Since the 1980s, advances in the field of biotechnology have fueled the development of innovative products from basic research findings. To sum up, the chemical industry is actually a process industry encompassing thousands of products used in different applications and enabling innovations in their customers’ industries. The industry is capital intensive and consists of various segments, each having specific success factors and typically showing a multiregional character. The industry has a long tradition, with the initial industrial chemistry dating back to the 1860s in Great Britain. Applying insights from industry lifecycle theory [15], the industry can be classified to be in a maturity phase where the basic technological know‐how is well diffused and the focus is – except for patent‐heavy pharmaceuticals and some specialty chemicals – moreover set on technological improvements rather than on breakthrough innovations.

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

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1.3.1 Business Transformation and Organizational Change Processes Business historians have analyzed the successful companies in the chemical and pharmaceutical industries by (mainly) focusing on past events. As mentioned earlier, Chandler (2005) identified a company’s ability to create learning processes from one product generation to the next as being key to success. He found that companies with a focused strategy, limited in complexity in terms of different markets and products, are often more successful than firms pursuing strategies of unrelated diversification [3]. Another striking finding addresses the capability of successful companies to manage relationships within a value network. A chemicals firm’s position in industry networks, encompassing other chemical and pharmaceutical firms, and a supporting nexus of specialized suppliers of products and services, serves as a market entry barrier. While these networks were basically established for the chemical industry between the 1880s and 1920s, developments in biotechnology might open up a new field where positions for new as well as established players are not yet fixed. In recent years, the questions of whether and how companies can proactively adapt to upcoming changes have gained a lot of attention. Approaches have touched various aspects at all levels within a company, from path‐dependent strategic behavior over continuous innovation cultures to the presence of (certain) dynamic capabilities that enable firms to adapt to changing environments. On the one hand, exogenous developments, such as globalization, demographics, and technological changes, have had a profound impact on the way companies do business. On the other hand, endogenous dynamics, such as product and process innovation or the re‐invention of business models, may also lead to large‐scale organizational change. Organizational change is defined as a shift in form, quality or state of an organizational entity over time [17]. Change processes can be observed for multiple entities (e.g., a whole industry) or for a single entity (e.g., a single company). One influential field analyzing change at the level of multiple entities is the so‐called population ecology school, stating that the ability of a single entity to change is very limited. This school proposes a Darwinian view, describing change processes as a result of variation, selection, and retention to be adequate in order to understand change processes (e.g., [18]). The opposite position is taken by the school of planned change. This model in turn views developments at the level of the individual organization as a result of an active organizational design process, where decision makers formulate goals, implement measures, and evaluate the impact on the defined goals (cf. [19] for the different models). In the following, we discuss organizational change from a single company perspective and base our reasoning on the assumption that companies have some discretionary power in actively designing change processes.


Organizational change processes can differ according to their intensity. Incremental changes encompass minor modifications of the status quo, whereas radical changes have a profound impact on different fields of an organization [20]. Transformation processes can additionally be distinguished in terms of the question of whether the organization anticipates an upcoming need to change or whether it reacts passively as a response to external influences [21]. Even though the term proactive transformation appears to have a positive connotation in the practice‐oriented management literature, proactive behavior might not be a successful concept per se. On the contrary, it is challenging for managers to balance the need for stability and exploitation of today’s resource base, on the one hand, with the prospects of exploring new paths, on the other. Summing up, we use the term business transformation to describe processes of intended organizational change. We conceptualize managers as change agents who proactively or reactively try to develop and shape their fields of responsibility (company, business unit, or department) in order to achieve prior defined organizational objectives. In a recent study, we analyzed the need for business transformation in the German chemical and pharmaceutical industry by means of a large‐scale online survey, conducted in 2014. In this survey, we addressed upcoming trends, potentially creating a need for transformation, and also asked participants about the relevant management activities to cope with these trends. In total, 270 people participated in the online survey: 141 managers possessing relevant experience in the industry completed the questionnaire; 34% of the respondents considered themselves as being experts in the segment of specialty chemicals, 16% in the field of polymers, 22% in pharmaceuticals, 10% in basis chemicals, 8% in agrochemicals, and 10% in other fields; 50% of the participants were top‐ managers (board level), 20% were experts in R&D and innovation, 25% had other leading positions in chemical and pharmaceutical companies, and 5% held other positions. The sample covered different company sizes: 13% of the participants were affiliated with companies of up to 100 employees, 14% were in firms with 101–1000 employees, 21% were in companies with 1001–10 000 employees, 42% worked in large companies with 10 001–100 000 employees and 10% in companies with more than 100 000 employees. In the following, we present findings from this survey. In doing so, we distinguish between “successful” and “less successful” companies based on participants’ self‐evaluation.2 Following this distinction, 31% of the respondents classified their companies as being very successful, while 57% designated their companies as being on average successful, and 12% as not successful. 2 The participants were asked to answer the following question: “Overall, we are more successful than our strongest competitors” using a scale from 1 = “I strongly disagree” to 7 = “I strongly agree.” Participants answering with 1 or 2 were classified as “not successful,” those answering 3, 4, 5 = “average successful,” and those answering 6, 7 = “very successful.”

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1.3.2 Drivers for Change The future of the chemical industry, and particularly the impact of so‐called global megatrends, is actively debated in the literature [1, 22, 23]. Global megatrends are long‐term trends that may have a global reach lasting for more than 20 years and are defined as drivers of change that affect all parts of society, business, and politics. On the basis of these megatrends and their complex interplay, political institutions, industry associations, and companies create different scenarios for the future. Industry associations employ these pictures to communicate potential opportunities and risks for an industry to politicians, while companies utilize these scenarios to identify relevant fields for action, for example the need for cost cutting in one division and for investment in another [13]. There might also be a critical side to taking megatrends as a starting point for industry scenarios. Megatrends are often vague, for example the megatrend of urbanization. Information about how many people are moving from rural communities is just given in a span. The selection of relevant trends is always subjective and their interaction does additionally hinder the determination of precise scenarios. On the other hand, taking the trends into account may increase companies’ understanding of forces influencing their market and technological environment as well as their current business model. In our study, we focused on megatrends since they are one of the prevailing topics in the chemical management literature in the 2010s. Megatrends may thus serve as a common frame of reference when analyzing the necessity of transforming business in the chemical industry. There are different ways to group relevant trends for the chemical and pharmaceutical industry [22, 24, 25]. For our study, we distinguished between 12 trends and asked the participants to rate their importance for their business activities in the years 2014 and 2024 (Figure 1.2). Across all segments, the most important trends for the chemical industry in 2014 are the ongoing globalization, including the increasing importance of the Asian market, the need for interdisciplinary innovation, for example in the field of bio‐ or nanotechnology, and the growing significance of a higher employee qualification. The German chemical industry is thus becoming more international, opening up to adjacent scientific disciplines, and assigning significant importance to a highly skilled workforce in order to attain its goals. It is striking that for the year 2014, so‐called “green issues,” for example sustainable products, the shift to alternative energy sources, and the use of renewable resources, are considered to have the least relevance of all potential megatrends. At the same time, participants assume that these aspects will increase in significance until the year 2024. Successful companies – as defined earlier – attribute higher importance to these trends than less successful ones.

Management Challenges in the Chemical and Pharmaceutical Industry Topic

Demographic change

Megatrend

Importance of megatrends in the years 2014 and 2024

Developed countries: Aging and shrinking population Developing and emerging countries: Growing population Increasing importance of Asian market

Globalization

Innovation & Technology

Energy & Resources

New consumption patterns

Business world in Europe

Urbanization in developing and emerging markets Cross-industry innovation (e.g. electric mobility) Interdisciplinary innovation (e.g. bio- and nanotechnology) Use of alternative energy sources (e.g. wind, solar) Use of renewable resources (e.g. biomass)

Increasing standard of living in developing and emerging countries Consumption of sustainable products in industrialized countries Heterogenous workforce (diverse background, qualifications and career paths) Increasing importance of higher formal qualifications (more skilled workers, more university graduates)

1 = not at all relevant – 7 = very relevant Shown is the statistical mean of the answers.

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

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

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

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●

Managers from the specialty chemicals segment also underline the meaning of Asian markets and the growing worldwide population. In contrast to the basic chemicals segment, special importance is attributed to interdisciplinary and cross‐industry innovations as well as a highly skilled workforce. This finding corresponds to the identified success factors for the specialty chemicals segment, which are, among others, the presence of customer and market knowledge, and a customer‐specific development of solutions. The pharmaceuticals segment indicates the realization of interdisciplinary innovation as the most essential trend, followed by the opportunities that can be realized due to an ageing population in industrialized countries and growing Asian markets. Highly skilled workers are thus significant. Again, the empirical findings support our description of key success factors for pharmaceutical companies, that is, high R&D intensity, availability of market and customer knowledge, and use of qualified personnel.

In summary, the identified megatrends and their impact are perceived differently by the respondents depending on their associated sub‐segment of the chemical industry. Nevertheless, the specific key megatrends are stated to remain important in the future. While this may hold true on an aggregated level, the question of whether and how a specific chemical company will have to transform its business activities has still to be examined – an aspect that has not yet been analyzed in other studies. 1.3.3 Fields of Business Transformation In our study, the participants also evaluated to what degree their business unit or company would have to change in the light of the described trends (“need for change”) and to what degree the respective unit is already prepared for this upcoming change (“degree of preparedness”). They identified a medium need for change for all three segments. Regarding this aspect, a significant difference between the chemical and the pharmaceutical industry, on the one hand, and other industries such as electronics, newspaper or financial industries, on the other, can be observed. While the chemical industry actually shows an evolutionary change pattern, the other mentioned industries are characterized by a more radical or “disruptive” change. Thus, radical innovations might not be expected in the chemical industry in the future. The degree of preparedness in the chemical industry corresponds to the required change when considering the means of the answers. Differences can however be identified across the relevant fields of change. The degree of preparedness coincides with the existing need in the areas “strategy and business model” and “business processes,” whereas a relevant discrepancy can be identified in the fields “workforce qualification” and “company culture.”

Management Challenges in the Chemical and Pharmaceutical Industry Need for transformation

Degree of preparedness

Total Basic chemicals

Specialty chemicals

Pharmaceuticals 1

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1 = very small; 7 = very large; 1 = very poorly; 7 = very well Shown is the statistical mean.

Figure 1.3 Business transformation in the chemical industry

Dividing the sample by industry segments as shown in Figure 1.3 reveals additional insights. The field of basic chemicals seems to be very well prepared, thus facing a rather small need for change. In the field of specialty chemicals, participants indicate a higher need for change. They assume that expected shifts within the key field of cross‐industry and interdisciplinary innovation will imply changes in the workforce qualification and the company’s values. With regards to the pharmaceutical segment, the highest levels of required change encounter the lowest degree of preparedness. A great need for transformation is seen within the fields “corporate culture,” “employee qualification,” “strategy/business model,” and “business processes.” Compared with the other segments, the pharmaceuticals segment shows – with the exception of the topic strategy/business model – higher gaps, not only regarding so‐called “soft issues” of “corporate culture” and “workforce qualification” but also concerning specific business processes.

1.4

Managerial Challenges in the Chemical Industry

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

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1.4.1 Creating Strategic Learning Processes Product life cycles in the chemical and pharmaceutical industry vary in terms of duration. For example, the product life cycle for chemical products that are used in electronic devices is often very short – lasting merely six months [26]. However, the majority of goods manufactured by chemical companies are characterized by having long product life cycles. Some of the commodities at the beginning of the industry’s value chain were invented more than 100 years ago and are still produced on the basis of the same chemical reaction (irrespective of optimizations in the production process over the years). Commodity production is capital‐intensive and ties up product‐, market‐ or even customer‐specific resources. Therefore, it is necessary to leverage economies of scales in order to achieve a cost advantage. Over the years, chemical companies have developed core competencies in optimizing established processes and managing complex value chains. These core competencies can however cause rigidity [27]. Applying insights from path dependence theory, it could be argued that the development of a chemical company is to a high degree determined by past decisions and investments. Companies may thus stick to their well‐established business activities and could be resistant to change. As a consequence, such a high continuity of relevant product, process, and market know‐how may prevent companies from looking outside the company, identifying future trends, and accepting the need for transformation [28, 29]. At the same time, routines and subsequent capabilities have been found to be developed in path‐dependent learning mechanisms. Strategic learning capability is defined as a company’s ability to derive knowledge from past strategic actions and to use this knowledge to adjust strategy [29, 30]. As illustrated in Figure 1.4, we asked participants in our study to assess the strategic learning capability of their company or business unit (according to the measure used in [30]). It turns out that successful companies stand out due to their strong strategic learning capability. More precisely, they are superior at assessing failures in strategic approaches and recognizing alternative strategies. Hence, these firms learn from their mistakes and are more flexible in adapting their current strategy and business practices. These firms significantly surpass other companies that are, according to their self‐assessment, not as successful. Strategic learning capability is crucial for chemical companies in light of the discussed megatrends. It is, for instance, a perquisite for adopting influences from bio‐ or nanotechnology and, accordingly, redirecting firms’ research and/ or production efforts. In addition, it enables companies to reconsider whether traditional success parameters on which their business model is assessed still apply. Recognizing non‐sustainable pathways and quickly adjusting strategies is facilitated when companies have such a capability – only then can a company take advantage of innovation and growth opportunities.

Management Challenges in the Chemical and Pharmaceutical Industry To what extent do the following statements apply to your company?

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We are good at recognizing unsuccessful strategies. We are good at determining precisely why unsuccessful strategies did not work. We are good at learning from our strategic mistakes. We regularly adapt the business and competitive practices we select based on what works and what doesn't. We are good at adjusting our current strategy once we get a feeling for how promising our actions are. We are good at recognizing alternative approaches to achieve our goals once it becomes clear that the original approach did not work.

1 = does not apply at all – 7 = applies completely Shown is the statistical mean of the answers.

Total Less successful Average Very successful

Figure 1.4 Strategic learning capability: successful versus less successful companies

1.4.2 Managing Value Chains Across the Globe A growth of 4.5% per year up to 2030 is predicted for the global chemical industry [22]. The extent of growth will presumably vary by region and industry sector. A modest increase with a growth rate of 1.8% p.a. (per annum) is forecasted for mature chemical markets such as Germany, while Asian markets are expected to grow above average. The rising demand in Asia is explained by the increased prosperity in the region, resulting in a greater number of people buying chemical‐intensive products. While the current share of Asian countries in the worldwide chemical production accounts for 40%, forecasts believe it will accumulate to 55% in 2030. By taking a company perspective, the key questions are how to participate in this growth and how to organize the value chain accordingly. In particular, companies have to decide about the geographic location of their value chain activities and about the way they handle interfaces across their globally dispersed activities. Our study thus included a question asking companies about the geographic center of their business activities. Across all business functions and business segments, respondents answered that the relative importance of Europe as a location will decrease as Asia’s importance will increase. For 15% of the companies, their current geographical production focus is located in Asia. This share is estimated to rise to 44% in the year 2024. Participants assume that they will additionally shift their marketing and sales activities to Asia: this number rises from 11% for 2014 to 41% for 2024. A shift is also expected for R&D

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activities. While 89% of the respondents indicated that the geographical focus of R&D activities in 2014 is in Europe and less than 1% in Asia, they believe this proportion to change in the next ten years to 77% for Europe and 15% for Asia. Creating additional capacities for downstream processes (e.g., production and marketing and sales) close to or in growing markets can be explained with the help of location science research. Location science identifies factors influencing companies’ international location decisions (for an overview cf. [31]). Scholars distinguish between sourcing‐oriented (e.g., raw materials availability, energy costs, labor supply, and skills), transformation‐oriented (e.g., climate), sales‐oriented (e.g., market potential), and government‐oriented (e.g., subsidies, trade barriers, business climate) aspects. For the commodity segments in particular, sourcing‐ and sales‐oriented factors are reasons for the decision to build up additional production and marketing and sales capacities in Asia. When raw materials are available on‐site, companies produce their products close to their customers and thus avoid high transportation costs. Companies need to interact with their customers closely, such as producers of specialty chemicals, and might move their sales and application engineering employees to the target markets as well. They thereby create rich communication channels [32] that might be more appropriate for discussing innovative topics. The still existing advantages for conducting R&D in North America and Europe explain why respondents only observe a low tendency to move R&D activities to Asia. Beneficial attributes are the well‐established academic systems and a highly skilled workforce. An additional advantage is the presence of strong networks between chemical companies, their customers in lead markets such as the automotive industry, and specialized innovation partners in related industries such as machinery. For instance, many leading chemical producers in principal customer markets are still carrying out their research and production activities in Germany. The physical proximity and a comparable level of professionalism thus facilitate organizing cross‐industry and cross‐ disciplinary collaborative projects. These agglomeration effects (e.g., in‐sourcing, transformation, and sales) described by location theory still favor R&D in Europe and North America. Though – according to business associations and managers in the chemical industry – the limited innovation climate and openness might be detrimental to allocating R&D activities to European countries. This is, for instance, reflected in the fields of green biotechnology and fracking, where R&D is concentrated in North America, due to the less favorable legislation and the business climate in Europe. In summary, it could be expected that the multiregional character of the chemical industry, with manufacturing activities in the major markets of North America, Europe, and Asia, each of which mainly serve their regional markets with little trading between the regions, will probably prevail. Only for active


ingredients in pharmaceuticals is a more global production pattern anticipated. Furthermore, it is important to consider the international interfaces of multinational companies where sourcing, production planning, product innovation activities, quality assurance, and marketing activities need to be coordinated across the globe [33, 34]. This additional complexity is difficult to cope with from a leadership and human resource management perspective even though it can be reduced by powerful IT systems. 1.4.3 Optimizing Processes The chemical industry has reached a mature stage in its life cycle. This can be illustrated by the results from our study concerning the focus of organizational change during the last five years. Companies in the chemical industry create profits by putting significant emphasis on optimizing the cost structure of their operative processes and adapting their production strategy accordingly, for example through projects for production excellence such as Six Sigma. Successful companies have concentrated even more on these aspects than less successful ones (Figure 1.5). Changes in market‐related strategies such as the pricing and sales or the commercialization strategy, for example, from sales to leasing or licensing models, have received little attention over the last five years. Thus, process In the last five years we have significantly...

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Changed our pricing and sales strategy. Changed our commercialization strategy (e.g. change from sales to leasing or licensing models). Changed the cost structure of our products or services. Changed the calculation of strategically relevant costs. Changed our production/operative strategy (e.g. through projects for production excellence such as Six Sigma). Changed the cost structure of our operative processes. Changed KPIs (key performance indicators such as ROI, ROA, or lead times).



Figure 1.5 Focus of optimization activities

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optimization aspects have dominated companies’ activities to increase profits – a behavior that is typically associated with an industry in the maturity phase of the industry life cycle. In order to grasp the findings in more detail, specific results for external and internal process optimization are described in the following [35], again by simultaneously distinguishing between successful and less successful companies. With regard to external process optimization, the responses of the participants show that integrating customers into value creation is much more prominent than integrating suppliers. This seems to be particularly true for companies merely buying commodities from their suppliers in a standardized process, with price being the main buying criterion. In this type of supplier– buyer relationship, the supplier’s role for value creation is limited, thus, expanding the relationship from the buyer’s perspective does not provide a particular advantage. Managing the relations to suppliers should attract much more attention, whereby the extent should be evaluated based on the scale of each supplier’s influence on the company’s competitive position through their individual offering and role for innovation. This can be observed in the automotive industry where suppliers are segmented and managed depending on their strategic importance. We also find that successful companies put more emphasis on managing external relations than less successful companies. Successful companies often establish a close and interactive dialog with their customers, supported by frequent visits. Customers are then involved in the product development process and plans are adapted to their specific needs [36]. Less successful companies appear to pursue these activities to a lesser extent. The strengths of successful companies regarding supplier integration are mainly rooted in close coordination with suppliers and addressing peculiarities and errors in daily operations more efficiently [37]. Overall, successful companies work more intensively together with their supply chain partners than less successful ones (which has also been found elsewhere, e.g., [38, 39]). With regard to optimizing internal processes, our study explored the role of mass customization and the realized degree of value chain flexibility in the chemical industry. The concept of mass customization describes the approach of companies to combining the benefits of mass production – particularly the associated lower costs – with benefits of customer orientation – especially the willingness to pay more [40, 41]. This approach is rather irrelevant for commodity products located at the beginning of the value chain but is of great importance for companies active in later stages. Particularly in situations where the advantages of customization diminish over time as more and more competitors are able to offer the initial customer‐specific speciality (“commoditization of specialities”), mass‐customized manufacturing might present the only paths to remain profitable.


Successful companies appear to have a better understanding of and capacity to implement mass customization than other companies. They produce large quantities and simultaneously provide a great variety of products without sacrificing quality. These companies are able to react to customer‐specific requirements more flexibly, can change their production processes quickly, and have fairly low (additional) set‐up expenses. Less successful companies responding to the survey did not report comparable experiences. This wide gap between successful and less successful companies also exists with regard to value chain flexibility (Figure 1.6). This flexibility implies processing and providing better individual services, sharing information with customers and suppliers, distributing customer‐related information internally, and, therefore, an overall stronger performance in boundary‐spanning activities [42, 43]. Value chain flexibility is not equally relevant for the three chemical segments. Companies involved in continuous production face less need in this regard than, for instance, volume‐oriented producers of specialty chemicals. In the production of APIs, once processes have been accredited, a high level of flexibility is not a goal in itself. As production chains are becoming diversified and flexible due to an increasing modularization of processes and additional manufacturing processes, value chain flexibility may also gain more importance for companies in the chemical and pharmaceutical industry. To what extent do the following statements apply to your company?

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My company has a flexible system of services, which can be adjusted to changing customer requests. My company has established a system, which allows us to process individual customer requests. Using modularized solutions, my company is able to process a multitude of individual customer requests. My company is able to share both standardized and customer-specific information with external suppliers or customers. My company is able to exchange both standardized and customer-specific information within the company. Cooperation along our supplier chain gives my company enhanced operative flexibility.

1 = does not apply at all - 7 = applies completely Shown is the statistical mean of the answers.


Figure 1.6 Value chain flexibility

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1.4.4 Creating Product, Process, and Business Model Innovations Innovation has always been a key driver of success in the chemical industry. While the incentive for innovation traditionally came from the core discipline of a company and thus stemmed from basic chemical research, stimuli for further developments are nowadays expected to be derived from related disciplines such as biology, bio‐ and nanotechnology [44]. In addition, business opportunities are not necessarily found within the “defined” boundaries of an established industry. At some interfaces, for example, in the field of electric mobility, the beginnings of converging processes between different industries can be observed [45, 46]. Such a development is accompanied by firms acquiring new knowledge that was not part of their traditional expertise and by adapting technology bases distinct from former core competencies [47]. Thus, companies in the chemical industry have to open up their innovation activities to emerging academic disciplines and other industries, as has also expressed in the open innovation concept by Chesbrough [48]. One further challenge for companies is finding the right balance between product and process innovation as well as between explorative and exploitative innovation activities. Companies in the chemical industry can improve their profit position by generating and applying new knowledge for innovation, that is, exploration, and thus either improve their cost position through enhanced productivity (in the case of process innovations) or increasing their revenues through selling new products or better product quality (in the case of new product development). Profits can also be increased by making better use of existing knowledge to generate new products or processes (exploitation) [49]. Among the companies surveyed, successful players are clearly more committed to the field of innovation than the less successful ones. They invest more in R&D and have first‐class R&D facilities, offer more innovative products and services, own more patents, and perform more pioneering work, as reflected by occasional breakthrough innovations in the industry. Our study thereby illustrates that innovation activities play an important role in the success of a company, even in a mature industry. Besides product, service, and process innovations, companies can be innovative with respect to their business model. The business model logically reflects how the business of a company works (see also Chapter 7). It describes how a company generates benefits for its customers and partners and how the company, at the same time, is able to capture a part of that value. The business model, and its adaptability to current market needs, has a great impact on success [50, 51]. According to our study, successful companies have a better understanding of their business model than their less successful counterparts [52]. Successful firms are aware of the social, technical or political discontinuities that could significantly reduce the success of their business model, they evaluate their business model, and units and individuals within these firms are aware of how they contribute to the firm’s business model (Figure 1.7).

Management Challenges in the Chemical and Pharmaceutical Industry To what extent do the following statements apply to your company?

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We are aware of changes (social, technical, or political) that could significantly reduce the success of our current business model. All units in our company (departments, sections, lines, work groups, individuals) are aware of how they contribute to our business model.

We know the business models of our competitors.

We regularly test and evaluate our current business model.



Figure 1.7 Business model sensing

It is important to note that business models evolve over time. A company’s creativity with regard to the development of innovative business models can thus be a key driver for company success. Particularly within a mature industry where standardized and interchangeable products prevail, unusual solutions gain importance. Companies active in other sectors might yield different perspectives and serve as good examples for developing new business models for chemical companies, for example, telecommunication providers offering value‐added services such as data streaming or cloud computing in order to sell more data volume. Pursuing sustainability objectives might open up future business opportunities for chemical companies, and the trend towards personalized medicine might facilitate the creation of new business models for pharmaceutical companies. 1.4.5 Developing Human Resources In our study, participants ranked the growing importance of higher qualified personnel as the third most important megatrend influencing business activities in the chemical and pharmaceutical industry. This is not surprising as – of course – all of the other trends outlined (such as the growing importance of the Asian markets, the need for cross‐industry and cross‐disciplinary collaboration to foster innovation) have a direct impact on human resources (HR) and human resource management (HRM) within companies. From an internal HR

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perspective, emerging challenges fall into one of the following three activities: “recruiting employees,” “retaining employees,” and “keeping employees up‐to‐date.” With regard to “recruiting new employees,” chemical and pharmaceuticals companies face the challenge of attracting a sufficient number of suitable candidates [53, 54]. The chemical industry is obligated to strengthening its image. Employer branding studies show that the industry – despite above‐average salaries and very good social benefits, such as a greater living standard due to chemical products – has to improve the perception among the talented individuals of the next generation. To increase their attractiveness, chemical companies should be positioning themselves as transparent, credible and reliable partners, and communicating their generated value for society, for example, bringing prosperity, fighting diseases, creating new energy‐efficient materials. Additionally, chemical companies could expand their talent pool in terms of diversity in order to ease cooperations across disciplines and industrial sectors as well as to steer global value chains [55]. At the same time, it is important to fill knowledge gaps with tailored educational measures. As a result, HRM will become more multi‐ faceted and increasingly focused on the individual employee. With regard to the challenge of “retaining employees,” chemical and pharmaceutical companies are already making various efforts to retain the talent that they have attracted [56]. Flexible working‐hour models allow for better work– life balance (“dynamic work place”) and are an important factor in employee retention. The development of a variety of career paths that value leadership qualities as well as functional expertise can help ensure higher engagement and continued employment. A company culture that embraces diversity in the company and sees sustainability as a business driver, will support necessary change processes to gain global competitiveness [57]. These different measures have to be part of a global HR strategy, ensuring common values and standards across business units and personnel exchange as well as allowing regional adaptations in order to acknowledge differences between mature chemical markets in Europe and the fast growing Asian markets. The third challenge in HRM focuses on the question of how to keep employees up‐to‐date with regard to their technical expertise and working skills: the time employees will be working in chemical and pharmaceuticals companies will be extended as the average retirement age increases and some employees are entering the labor market at a younger age due to shortened school periods and the Bologna’s bachelor and master system. At the same time, market changes and new emerging business models necessitate employees to provide even more learning capabilities to facilitate companies’ long‐term success. In addition to keeping up with state‐of‐the‐art knowledge in the fields of chemistry and engineering, it is important to develop interdisciplinary competencies and the ability to establish collaboration with other industries [1]. In the context of continuing globalization, emerging interfaces need to be managed when


leading international teams are spread over two or three continents. A new focus will thus be placed on decentralized management and will directly affect qualification requirements for managers. They not only have to master different languages but have to provide intercultural competences and the ability to manage employees in different time and cultural zones [58]. As traditional lectures and workshops might be not be sufficient to acquire these leadership qualifications, new training concepts, including coaching elements, must be created [13]. Educational pathways within the chemical field evolve from a pre‐Bologna paradigm (including one full‐time study phase before entering professional life, which is complemented by further occasional training periods) to more differentiated and individualized careers in the future (shaped by a short initial study followed by gaining professional experience and continuing professional education in modular (master) programs) that will continually keep employees up‐to‐date.

1.5

Summary

The characteristics of the chemical industry, the global megatrends and associated changes, and the adaptation of business strategies and activities the industry is facing, along with the resulting challenges for managing chemical companies, can be summarized as follows: ●

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The chemical industry is a capital‐intensive industry characterized by high diversity in terms of products, segments, and end markets. The portfolio of products in the chemical industry ranges from energy‐ and cost‐ intensive production of bulk chemicals produced and sold in large volume to highly individualized specialty chemicals manufactured and marketed in small quantities. Companies that are working with basic chemicals, specialty chemicals or pharmaceuticals require different capabilities to succeed in the given segment. The industry finds itself at a mature stage shaped by a lower intensity of innovation of the (traditionally) underlying scientific disciplines. New influences are anticipated to be derived from other areas such as biotechnology or nanotechnology. Thus, companies have to update their knowledge base through cross‐industry or cross‐disciplinary activities. The industry has a multiregional character, whereby the majority of products are produced in the respective regions where they are sold. North America, Europe, and Asia represent the main markets. Above GDP growth is expected in particular for Asia. As globalization continues, chemical companies will build up additional resources in the growing Asian markets. Consequently, managing global value chain activities will present a constant challenge for multinational companies.

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Companies, active in the chemical industry, recognize the need to align their business activities according to the continuing globalization, see the opportunity to benefit from cross‐disciplinary innovations, and anticipate the increasing importance of a highly skilled workforce. Innovation continues to be a key driver for the success of the chemical industry. Prospering companies invest more effectively in R&D and implement business model innovations earlier than less successful firms. In addition, optimizing processes is crucial for chemical companies: successful players establish closer relationships with external partners than less successful businesses, and internal process optimization, via mass customization and high value chain flexibility, is adopted more seriously by successful companies than their less successful competitors. In light of the identified megatrends, one core management challenge for chemical companies lies in the adequate development of human resources – to have a highly skilled workforce, that is able to steer global value chains, cooperate with different industries and disciplines, and which embraces the principle of lifelong learning.

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