Academic journal article Research-Technology Management

Creating Value in Turbulent Times: Dow Chemical's CTO Faces Six Key Challenges in Managing Innovation in a Tough Economy

Academic journal article Research-Technology Management

Creating Value in Turbulent Times: Dow Chemical's CTO Faces Six Key Challenges in Managing Innovation in a Tough Economy

Article excerpt

A Danish proverb says, "Bad is never good until worse happens." That proverb might well have been written about the chemical industry in 2008. The past year has been challenging for all manufacturing businesses, but it has been particularly hard on the chemical industry. The scope and magnitude of the combination of risks, circumstances and decisions that we faced in 2008 led to a year unlike any other. Implementing strategies for managing innovation can be challenging enough during the best of times, but it is all the more difficult--and critical-during an extended crisis. Sound practices that manage innovation and deliver both short- and long-term profitability are crucial to the continued success of any company. Such practices were put to the test in 2008.

At The Dow Chemical Company, planning for 2008 was dominated by the question of hydrocarbon costs. Like most companies, we use scenario planning to assess sensitivities and develop plans for key input costs. We had modeled oil at an average price of $60 a barrel for the year, with $80 at the high end and $40 at the low end. However, the problem with averages is that they often do not describe reality at all. For example, in 2008, the average price of oil was $99.57. But this average takes into account a mid-year spike to unprecedented levels-nearly $150 a barrel--and an end-of-year drop to nearly $40 a barrel.

Dow's world is quite different at $40 a barrel from what it is at $150. At $40, feedstock price is less important, so we can use technology and innovation to expand margins. At $150, the only way we can survive is by pushing prices up.

A key operating measure in our business is utilization. By mid-2008, we still had reasonable operating rates of nearly 90 percent, but we had only mixed success pushing prices up on our downstream customers. Faced with deteriorating earnings and soaring hydrocarbon costs we announced corporate-mandated price increases of 20 percent and then 25 percent more at a later date. In addition, in 2008 we were set to launch our largest joint venture in our history with Petrochemical Industries Company of Kuwait (PIC). This JV had an enterprise value of more than $17 billion.

In the second half of 2008, oil prices collapsed. This was a disaster because oil prices collapsed for the wrong reason--demand destruction. Operating rates plummeted in our industry, falling from about 90 percent to 68 percent in less than six months. Our North American assets were operating at less than 45 percent for December, a level we have never seen in the company's history. To put this in perspective, it becomes a challenge to make money in the chemical industry when rates drop below 80 percent.

But it got even worse. The sources of our feedstocks, the North American petrochemical complexes, are heavily concentrated on the Gulf coast, and the 2008 hurricane season was disastrous. At the same time, the financial world was collapsing--13 banks within one month. Some of these banks were expected to be key players in our financing of the Rohm and Haas purchase. Then, hurricane Ike destroyed much of the Houston area the same weekend Lehman Brothers went bankrupt. This was a massive one-two punch. And in the final days of December 2008, our JV with PIC dissolved fight before it was set to close, putting a devastating finishing touch on a year to forget.

Reporters have recently said they are tired of the term, "The Perfect Storm"--that in fact we seem to have a new Perfect Storm every few years. But honestly, if this was not a perfect storm I don't know what is! Dow has an excellent risk management system and we had plans in place for each of the individual risks described above. We even had scenarios combining several of these risks. But neither Dow, nor the world, planned for a scenario where everything (economic collapse, hurricanes, feedstock disruption, liquidity/credit crisis, and failure of the Kuwait deal) occurred simultaneously. …

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