Research from FCLTGlobal and others confirms that long-term companies outperform on financial metrics, including revenues, profitability, and stock price, as well as non-financial ones like job creation and sustainability.
The benefits of successful R&D are often significant and can be transformational for a company, and for broader society, a contribution which has been well documented.1 But R&D spending (especially long-horizon R&D project spending) faces a unique set of short-term pressures relative to other types of long-term investment that leads many organizations to cut projects in this category.2 Unfortunately, it is often those same long-horizon projects, left on the cutting room floor, that could deliver the most long-term value creation potential.
As a company with over a century of history of product evolution and reinvention, innovation has been at the core of everything Dow achieves. From launching the “Idea Factory” in the midst of the Great Depression while other companies were cutting back on R&D spending, to allowing employees to spend 10% of their time on the project or idea of their choice (something Google famously imitates today), to the development of groundbreaking materials – Dow’s innovation strategy has (with few exceptions) consistently taken the long view. How has a company with over 120 years of history maintained this focus?
This long view translates into a culture of innovation at Dow that proliferates throughout the organization, utilizing many of the tools and solutions to managing R&D that were highlighted in FCLTGlobal’s recent publication.3
Managing resource constraints and balancing timelines.
Today, Dow has more ideas than time and resources, so trade-offs have to be made. The short-term ‘quick-win’ type projects are necessary to fill in the gaps in the portfolio while the team works on longer-horizon things. In general, the company’s larger technology platform launches take anywhere from five to ten years of research and development plus another five to ten years to scale and launch. As R&D Strategy Leader Joel McDonald noted, getting the right balance in the portfolio takes careful work, “Stamina is required to stick with long-term projects, but there is also an element of patience. You have to know when to turn on the spigot and when to hold back – the worst thing to do for a long–term project is over–resourcing the effort to accelerate invention. Once the invention is in hand,once the path forward is more certain – adding resources is appropriate. Timing this rightrequires a lot of restraint.”
Customer centric approach carries success.
Gaining a seat at the design table of its customers is an enduring goal for Dow, and in many cases has resulted in these customers gaining exceptional access to Dow’s own innovation tools. This has been a winning strategy, but those relationships take time to nurture. The team has worked hard over the past ten years to connect with customers and value chain partners early in their design process, building the value proposition alongside those key stakeholders. This gives projects with long-time horizons staying power. As Mark Jones, R&D Strategy and Communications Fellow noted, “Ten to fifteen years ago Dow was pursuing a number of different projects, such as materials for batteries and solar, few survived but the ones that are alive have the support of an end customer with an aligned vision. Especially for longer-term projects, if there is a receptive partner at the other end that really makes a difference.”
Process innovation is just as important (if not more so) as product innovation.
As Brett Quencer, R&D Operations Director described, “Innovation is not just making new materials or molecules, a lot of it is process innovation. How you make the molecules is really important. Innovative manufacturing is critical to the success of the company, allowing Dow to make materials better, faster, cleaner and more efficiently.” This devotion to process innovation has resulted in significant investment in R&D infrastructure, including a devotion to high throughput infrastructure and equipment that can be used across a wide range of projects. Process innovation is less visible to investors, not commonly evident in the addition of new products or lines of business, rather showing up in the form of cost savings, return on capital, and sustainability enhancements.
Metrics and milestones keep long-horizon projects on track.
To ensure everyone is on the same page, Dow maintains an internal innovation playbook, annually updating a description of all projects within the company, with projects ranked in order of priority. This rigorous ranking methodology takes into account a project’s expected risk adjusted return, time horizon categorization (ranging from core product improvement all the way to new product-new market opportunities), and key milestones. Dow takes a similarly rigorous approach to evaluating past performance to keep perspective on how innovation initiatives perform over time. Using a five-year lookback, the company tracks whether the intellectual property created and related revenue it generates lived up to forecast expectations. The R&D Team tracks their “say/do” ratio as a key metric for success, asking the question: “Did you do what you said you were going to do?”
Sustainability, the new frontier in innovation.
The commitment to long-horizon innovation has recently been put to work supporting Dow’s sustainability initiatives. The organization’s sustainability goals were first introducedin 20064, with the company now on the third stage of goal setting represented by Dow’s 2025 Sustainability Goals. Key focus areas include products and solutions in support of a transition to a low-carbon world, a commitment to pursue zero-waste contributing to acircular economy, and the development of safer sustainable materials.
Sustainability fits nicely into Dow’s established innovation playbook methodology. While linked to potentially transformational innovation, new products driven by sustainability will augment current offerings while also opening new lines of business. All projects are subject to the same rigorous standards. In Dow’s view, sustainability is simply another dimension in which value is created. Quencer summed it up saying, “We don’t arbitrarily advantage sustainability driven projects, as they have to meet the same hurdles as any other project, delivering value for our customers and for Dow.” This results in innovations that deliver sustainability benefits and better performance in the same product – a combination that drives adoption and sustainable competitive advantage.
In summary, the above-identified disciplines may just be the key to the company’s long-term success and staying power.
See Eberhart, Maxwell and Siddique (2002); Lev, Radhakrishnan, and Ciftci (2006); Su, Chen and Chang (2009); and Bessembinder (2020).
For more on these pressures and solutions to alleviate them please see FCLTGlobal’s whitepaper, Funding the Future, available at https://www.fcltglobal.org/resource/innovation/.
Funding the Future: Investing in Long-Horizon Innovation, FCLTGlobal, 2020, https://www.fcltglobal.org/wp-content/uploads/Funding-the-Future_FCLTGlobal-1.pdf.
https://corporate.dow.com/en-us/about/company/history/timeline/innovation-at-the-intersections.html.