Academic journal article Research-Technology Management

How R&D Helped Transform DSM: Business Strategy Can Facilitate a Dialogue between R&D and Business That Leads to Successful Innovation

Academic journal article Research-Technology Management

How R&D Helped Transform DSM: Business Strategy Can Facilitate a Dialogue between R&D and Business That Leads to Successful Innovation

Article excerpt

What is, and what should be, the role of R&D in a company? How should business management direct R&D? Such questions occupied companies during the 20th century and will continue to occupy them in this one.

R&D is a distinguishing, but at the same time problematic, requirement of business and innovation in some of our most important industries. Invented in the late 19th century in the German dyestuffs industry, it spread to other industries and countries in the 20th century. However, R&D is not an easy recipe for success. Many projects lead to new or improved products and processes, and firms profit handsomely from such projects, but many other projects fail to produce any results, or produce unexpected results that fall outside the framework of existing businesses and strategy, leading to frustration or even financial losses.

This article explores these issues with the example of the Dutch chemical company DSM. This company has survived for more than a century by transforming itself from a coal mining company to a fertilizer producer, to a diversified bulk chemicals company, and again to a company focused on fine chemicals and high-performance materials (1). These transformations make DSM a very interesting company to study.

Two lessons can be drawn from the case of DSM. First, R&D investment is cyclical (2). R&D budgets rise and fall, coupled to the company's financial performance and shifts in its business climate. Moreover, management views of R&D are cyclical--the pressure for integration with (short-term) business objectives rises and falls. R&D's arena--the extent to which it can explore and develop options for the company--widens and narrows in response to these cyclical shifts in spending and strategic considerations.

The case of DSM shows, however, that R&D's arena cannot be narrowed endlessly. R&D needs to be integrated with business strategy but in such a way that short-term business objectives do not prevail and that R&D can generate options for the company. Business strategy offers an important way to achieve such integration.

The first section of this article sketches this cycle and provides an overview of the history of DSM's business and strategy. The second section couples the cycle to management intervention in R&D and to R&D performance.

The R&D Cycle

Figure 1 shows DSM's R&D budget from 1949 (the first year data are available) to 1999. The graph shows a pattern. The R&D budget grew rapidly until 1970 but fell quickly afterwards. Spending on R&D increased again in the 1980s but not at the level of the period before 1970. This is not a surprising pattern. Other companies went through similar periods of growth and (relative) decline after World War II (3).

[FIGURE 1 OMITTED]

There is, of course, a strong link with macroeconomic trends. In the chemical industry, the period between 1945 and 1970 was a unique period of spectacular growth and seemingly endless technological opportunities. After 1970, growth slowed, and two oil shocks and increasingly stringent environmental regulation had a tremendous impact on the industry. From a long-term perspective, the chemical industry normalized and ups and downs followed each other periodically. In markets that grew more slowly, innovation became more difficult (4).

The shifts in DSM's R&D budget also reflect, and are linked to, shifts in business strategy and the company's evolution. The Dutch government established DSM in 1902 as a coal mining firm, responding to the activities of private firms in the coal-rich province of Limburg, in the south of the Netherlands. The fields to be exploited by DSM proved rich in bituminous coal, a type of coal that was particularly suited for the production of coke, a fuel used for firing blast furnaces and other industrial purposes. Producing coke meant producing coke oven gas--a gas that was similar to the coal-based town gas widely used for heating, lighting and other purposes. …

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