Category Archives: Business

Market Pull and Technology Push

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The chemical business is, after all, a business.  You have to make something that somebody wants. Brilliant ideas are a dime a dozen. Getting a new product to market is harder than you might expect, even if you have a purchase order in hand. The transition from bench to 1000 gallon reactor is often full of unanticipated problems.  The process of forcing a new product or technology on a market that didn’t exactly ask for might be called “Technology Push”.  The process of responding directly to a clear market demand is called “Market Pull”.

Market pull is a force that business types, especially the MBA’s, feel best about.  It is easy to justify the allocation of resources to launch into a product development cycle that addresses a clear and quantifiable demand.  Duh. It’s a no-brainer. That is, if there are no bottlenecks to get through. The merits of market pull are only valid if the proposed technology has been shown to work to specifications. Beware of the inventor who cannot produce a prototype to back his/her patent.

Technology push is a circumstance wherein a company has a product or technology that might stimulate demand if it were marketed properly.  Now, an economist might say that there is no such thing as stimulating demand. They’ll patiently explain that this only stimulates an underlying demand that may not have been articulated. Whatever formalism you prefer, it is possible to dazzle potential customers with a new capability.  Clever people can dream up applications that the original inventors could have never anticipated. Look at Symyx with their fantastic technology package for high throughput experimentation.

It is a bit easier to write a business plan based on market pull because the job of forecasting revenue flows should be based on measurable market conditions. Again, the assumption is that the proposed response to the market pull is a technology that works.

A business plan based on technology push has to incorporate estimates of acceptance of change. You see, technology push is the realm of the paradigm shift.  Predicting outcomes from the early side of the timeline is very tricky.  Customers for paradigm shift technologies may be scarce.  Not all companies are interested in being an early adopter or a buyer of first generation technology. 

Market pull is the domain of orthodoxy, of the rightous and proper company president who is also a CPA and who worked his way up the ladder from the accounts receivable department. Technology push is the domain of the engineers and scientists.  These are the dreamers who know in their hearts that if you build it, they will come.

Successful technology companies are somehow able to give a voice to the technology people in the allocation of resources.  Very often, these companies are managed by chemical engineers. While ChemE’s may not be trained in advanced synthesis R&D, they are involved in the scale up and economics of new processes.  Chemists live in a 2-dimensional world of space and time.  Chemical engineers live in the 3-dimensional world of space, time, and money.  Their knowledge of economics is what causes them to rise to the top of the corporate ladder more frequently than chemists.

It seems to me that companies that thrive today are those who do both market pull and technology push. Market pull is the cash cow.  Technology push is the seed corn for next years crop.

The 80/20 Rule

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Having done my tour of duty in chemical sales and having travelled over a good bit of the northern hemisphere buying & selling, I’ve picked up a few insights into the B2B and “retail” chemical business.   Everyone has the major chemical catalogs on their desk. You know, the thick tomes from Aldrich, Spectrum, TCI, Matrix, Strem, GFS, Gelest, Fisher, etc.  There is considerable overlap in content, though some specialize in their chosen niches. While Aldrich makes no bones about total world domination, others are pleased just to dominate certain cul de sacs of chemistry. 

SAF is clearly the colossus of international catalog companies.  The Aldrich wing was started by Alfred Bader, now a retired art collector. To hear him tell it, Bader was frustrated by the limited availability of reagent chemicals and spotty service (by Eastman Chemical, if I am not mistaken).   Anyway, Bader was the right character at the right time.  He had a single-minded drive to give chemists what they needed and make a few bucks doing so. The slogan “Chemists Helping Chemists” was a the result of a sincere calling.  Bader visited university chemistry departments and asked professors what they needed.  Over time the Aldrich catalog collection grew and so did the company. Eventually, Bader was quietly forced out of the organization.  Founders can become “problematic” evidently.

Today SAF offers a vast collection of products and makes a sizeable fraction of what they offer.  Most professors don’t know it, but interesting materials from the lab might be saleable to a catalog company. If a prof has developed a new reagent or some useful fragment or pharmacophore, for instance, it might be worth contacting a catalog company to see if they want to stock it. You never know until you ask.

But we business types know that dealing with professors can be sticky, so Herr Doktor Professor, don’t get too high handed or greedy!  Academics are often missing the merchant gene and as a result badly price their wares.  The typical mistake is to over-estimate the demand and hike the price up to the astronomical numbers that you see in the catalogs. 

Here are the problems. Catalog companies do not pay the prices that you see in the catalogs. Buying material for inventory is equivalent to putting a stack of money on the shelf.  They have to pay lots of money up front before the first purchase order for your wonder product is faxed in. They have to pay for those damned fat catalogs, the inventory, salaries, the facility, regulatory compliance, certification, labeling, packaging, the time value of money, taxes, and they have to make a profit for the shareholders. So if the catalog price of something is $10 per gram, figure that they’re likely to keep their costs to $2 to $3 per gram for it, tops.  Obviously, this is subject to variation due the type of material or special negotiated deals.  But a 3x to 5x markup is not uncommon and is necessary to stay in business.

Then, after you ship the product to the catalog house and they put it into the collection, it might not sell.  It could be a dog.  The rule of thumb is that 20 % of your inventory will do 80 % of the business.  So, one of the ways to grow is to increase the number of products. Their interest in your product may be of a statistical nature rather than a firm belief in it’s viability.

I’ve heard many people go off about high catalog prices. I don’t like to pay the high prices either. But it is the cost of convenience.  If you need some obscure material, chances are that you can order it and have it in a few days. That is worth something and the catalog companies know it.  Hell, I’d do the same thing.

Scathing Diatribe on RTIL’s

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The 2006 ACS meeting in SF was interesting. In a much earlier post I lamented the recent trend of boring ORGN section meetings. That was definitely not the case this time around.  Of course, there was the usual assortment of faculty rockstars with their fawning groupies (OK, I’ve done that too). A lot of interesting insights into obscure stuff.  But I have to say that there was more buzz in the air in the ORGN talks.  My favorite profspiels included Toste, Doyle, Knochel, and Trost.

This time I noted a distinct lack of talks on room temperature ionic liquids (RTIL’s). After far too much breathless ballyhoo, the worker bees in this “area” seem to have hunkered down a bit.  Do I sound cynical? I have actually developed a manufacturing process for a commercial RTIL species. I can say that the economics of RTIL manufacture and certain kinds of applications of these expensive solvents can be awful.  At least awful in direct comparison to solvents like THF, toluene, ether, etc. If you’re using an RTIL, say, in a two-phase catalytic extraction process, then the comparison is faulty and the RTIL may be quite efficient to use.  However, if you need batch reactor volumes, i.e., 50 to 1000 gallons, then the batch process costs may require scientific notation.

Even pharma companies with deep pockets extending to the MOHO layer will worry about these economics.  In order to justify an $50-$250/kg solvent (!!), there has to be some whiz-bang process improvent to justify such costs.  In batch processing, RTIL’s are prone to the concentration of ionic species or water from the previous run. The practical consequence of this is that the RTIL may be a different material from one run to the next. It may or may not be an issue. But you’ll have to investigate and qualify it. You may have to polish the solvent (!!!) after each run to qualify the subsequent use of the RTIL. How green can that be?  

I cannot speak from the perspective of a pharma industry chemist. But I can speak as someone who makes specialty products for the pharma business. From bitter experience I can testify that the last thing you want to be is the supplier of the most expensive reagent in the customers process.  It is like a rock in their shoe. They’ll squirm and fitch around until they find a cheaper supplier or engineer a way around the offending reagent. Hell, I’d do the same thing in a heartbeat. Nothing wrong with that. But it is this sort of raw cost pressure that makes the commercial viability of RTIL’s difficult. 

The disposal of bulk RTIL’s may be expensive too.  Since as a group they are resistant to incineration, the natural question is- How do we safely and ethically dispose of bulk RTIL’s?  I’m sure that someone out there in the blogosphere has a comment on this.

<END RANT>
 

Fly the Friendly Skies

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I’m just back from the ACS Meeting in San Francisco. More on that later. Of immediate interest to me is how air travel has changed and how we are blithely accepting the loss of a sort of egalitarianism that has only become apparent as it is lost.

In this age of security theatre, we are being required by Homeland Security to adopt a passive posture as users of airline services. But despite all of the visible security measures, turns out that good old-fashioned police work may be the best approach to terrorism. The Brits defeated IRA terrorism that way.

This afternoon while boarding at Gate 86 at SFO, ticket holders were required to queue up behind two distinct openings that were literally side-by-side and distinguished only by the presence of a short piece of red matting on the floor of one of the two entryways. The strident young male gate attendant (United) was adamant that only First Class passengers and certain other flying gentry were to walk across the red mat. All others were to trod upon the common carpet adjacent to the red mat. He did not come out and vocalize it, but he did demonstrate his intent through the use of crowd control cordons commonly found in airports. It strikes me as tragic yet exquisitely comical that this enthusiastic fellow is forced to perform such an absurd dance at every departure. You pay an extra kilobuck and you get to walk across the red mat.

I pointed this out to other Zone 4 coach passengers and was met with the usual “my-gawd-why-is-this-guy-talking-to-me-why-doesn’t-he-shut-his-cake-hole” look. They looked at their watch or cell phone and found a reason not to talk further. It’s amusing. Most of us are only too happy to adopt a passive stance and tough through it. Humans can adapt to fantastic incursions into their civil liberties and not utter even the most plaintive bleet of protest. Stalin knew this. So did Pol Pot, Hitler, Mao, and others.

Another observation is the recent attention to the seat-belt sign by the flight crew. Flight crews on airlines that I have flown lately, United and Frontier, have been real sticklers for obeying the seat-belt sign and keeping passengers in their ticketed toilets. It doesn’t matter that your bladder is about to discharge a dilute urea solution on their expensive seats. At the slightest indication of turbulence, the pilot switches on the sign and that’s it- gotta sit down pursuant to FAA law.

The facile conclusion is that they are practicing loss avoidance by keeping passengers from being plastered to the ceiling during extreme turbulence. But such events are really scarce. I might suggest that this is a subtle means of keeping passengers in their seats and away from the cockpit or the galley. After all, we need to keep a clear line of fire for the air marshall on board.

<End rant>

Research and Development Horsepower

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What is becoming more apparent in the chemical industry is the rapid rise of R&D horsepower in countries that had only recently been known for low cost manufacturing. Previously, the universe of nations known for their R&D engines was limited to the familiar players- USA, Japan, EU, and to a lesser extent Russia (or FSU). These countries have extensive institutional and university infrastructure that can be applied one way or another to manufacturing output. 

Today, India, China, Taiwan, and South Korea in particular have begun to apply considerable traction with their R&D engines. Really, anyone who reads C&EN, Chemical Week, or CMR knows this. 

But reading about it is just an abstraction. It is quite another thing to witness it face to face. It is especially obvious at chemical trade shows like Informex, ChemSpec, or CPhI. Large tracts of the exhibition halls are literally crammed with small booths- perhaps 25 % or more filled with representatives of Asian firms bearing exotic names unfamiliar to attendees from the western hemisphere. Many exhibitors have product lists that seem strangely similar: generic API’s, heterocyclic intermediates, natural products, etc. It is all quite bewildering to Americans who still swagger with the attitude of Manifest Destiny.

As everyone knows, there has been a positive trend in outsourcing raw materials and intermediates from outside the USA. Having participated in this myself, I can say that foreign outsourcing allows much US manufacturing to remain competitive in world markets. However, it is one thing to outsource raw materials and quite another to outsource R&D.

While Americans must learn to adapt to the irreversible trend of positive growth in chemical discovery and manufacturing around the world, we should be a bit more circumspect about outsourcing R&D.

I’ve had the occasion to listen to more than a few American business leaders- smart upper level R&D management- crow about the cost savings they are seeing by outsourcing some of their R&D activity. In particular, we are seeing companies outsource custom synthesis of R&D materials or opening off-shore R&D centers. One US contract Pharma R&D firm specializing in API’s has been making hay about their outsurcing capabilities in discovery and process development to highlight their cost effectiveness.

These managers and executives give impressive talks at symposia and conferences. Their PowerPoint skills are impeccable, though no doubt aided by invisible in-house staff who gin up the cool graphics. These folks attend all of the trendy business method classes like Six Sigma and toss around quotes by Jack Welch.  They read all of the right business books found at airport bookshops. The obligatory and right-thinking buzzwords roll off their MBA tongues like melted chocolate, all carefully crafted to reassure stockholders that spending is being contained.

The out-sourcing of R&D doesn’t always begin with the outright execution of contracts to foreign comnpanies. It may begin more modestly, with the outsourcing of R&D custom projects. As relationships build and as project managers cycle through projects, greater and greater comfort with the outsourcing arrangement is felt. Soon, scale-up happens and substantial subunits of molecules are manufactured off-shore. Eventually, US plants are shut down and the equipment shows up on Dovebid for auction.

Yet for all the apparent good economic sense that R&D outsourcing may provide, I find myself uncomfortable with the concept. At one extreme there is the corporate cosmology spoofed in Sidney Lumet’s movie “Network“, where the real nations of the world are the multinational conglomerates who wield major currencies like an occupying army and nationality is an archaic formalism.  R&D is only the wagon that carries the troops for the greater glory and profit of the shareholders.

The other extreme would be the notion that R&D is part of our culture and is something to be guarded as national treasure. It is is an extension of who we are.

It’s obvious that R&D is part of the American economic driver and it should be expoited to bring prosperity to our nation. But that is not to say that US companies should provide companies in competing nations with a critical skill set in exchange for short term gain. Irrespective of non-compete agreements and secrecy arrangements, the fact is that once valuable technology is divulged you can depend on ambitious players to learn from it and accelerate their growth.  While apparently sensible in the short term, exporting your magic is ultimately foolish.

This essay may be a bit parannoid and provincial, but the USA is rapidly de-industrializing itself under the enchantment of its own intoxicating doctrine of promulgating laissez-faire. Allowing the progress of de-industrialization to occur under the influence of quarterly profit reports is perhaps inevitable under our present political era. 

I would argue that industry and commerce are not just a business math exercise. They are part of the fabric of our culture. Adopting abstract economic formalisms and dressing them up as social policy is to neglect why we start businesses at all. If the acquisition of money were the only goal, then we’d all go into finance. We start businesses in areas we prefer in order to make money and to have something constructive to do. It stimulates our brains and drives progress. It contributes to the common good. Work and industry are part of anthropology, not just economics.