Inventing To Order

Dow cuts R&D risk by finding out first what its customers need

Few companies would willingly gamble billions on a long shot. Yet when it comes to research and development, many do. Every year companies in the Standard & Poor's 500-stock index pour more than $100 billion into R&D. Sometimes it results in the kind of groundbreaking science that gave us lasers and AIDS drugs. More often it results in dead ends or intriguing innovations that nobody wants.

At Dow Chemical Co. (DOW ), scientists seeking a better batting average are using an approach that has been catching on in recent years, but with a twist. Before it heads for the lab, Dow solicits a wish list of products or technical characteristics from customers. If Dow can make what they want -- and enough companies agree to buy it -- Dow scientists will return to the lab and invent to order. The idea is similar to efforts at open-market innovation attempted elsewhere, but is designed to build in guaranteed demand.

The Dow method has its critics, who say it leads to incremental improvements instead of revolutionary breakthroughs. Dorothy A. Leonard, professor emeritus at Harvard Business School, says customers can't always articulate their desires and may have a tough time imagining far-out inventions. Companies that rely solely on such a customer-focused approach may find themselves outmaneuvered by competitors with more imagination. "The risk is that some competitor can leapfrog you and that you will not have the growth you need from new markets, new customers, and new product lines," says Leonard. Even admirers of Dow's method say it has risks. Among them: inventing new products, only to find out end users aren't interested. Says Russ Hagey, a Bain & Co. partner in its consumer products practice: "You want to pick your partners carefully."


Dow's latest innovation, a stretch fiber called XLA, shows the potential of the "reverse innovation" approach. By taking the market's pulse first, Dow discovered what its rivals so far had not: that apparel makers wanted a "soft stretch" fiber with a natural feel. That insight allowed scientists to return to the lab and develop a fiber that met their needs. While it's too early to tell if XLA will succeed, the signs are encouraging: Three apparel makers have rolled out shirts with XLA in recent months, and Dow will begin mass production in the fall. Dow thinks XLA could generate $300 million in sales in 10 years.

It won't be any cakewalk. Already, XLA has a tough rival in Lycra T400, a stretch fiber launched by DuPont (DD ) Co. a few months before XLA. Koch Industries, which purchased T400 in April, is ramping up capacity. Compared with XLA, T400 has more stretch, less shrinkage, and better wrinkle resistance. Still, Dow thinks XLA's superior texture can help it crack markets that have been off-limits to spandex, including men's dress shirts. Says Jean Aukerman, global brand manager for XLA: "We're trying to expand stretch into new segments."

When Dow began looking into fibers in 1998, it turned to ISIS International Inc., a Monroe (Conn.) consultant that over the past decade has helped Dow plastics launch five products. To start, ISIS gathered execs from more than two dozen companies that use fibers, promising to give them first crack at any new product that emerged from the process. ISIS CEO Richard A. Siegel got them to describe the characteristics they wanted that were unavailable. Says Siegel: "We're asking the market, 'What do you need?' and telling the client 'Here's what you need to invent."'

With that insight, Siegel pinpointed six opportunities that could yield $1 billion a year in new business. Of special interest: the apparel market's desire for a new fiber with soft stretch, cottony feel, and resistance to heat and chemicals. For Dow, this was a revelation. Until then, Kurt W. Swogger, Dow plastics' vice-president for R&D, and his team believed the big money was in a spandex-type fiber that could undercut rivals on price. That critical insight -- that the market wanted an alternative to spandex, not a low-cost imitator -- helped Dow avoid a huge error.


In months, Dow scientists had a prototype they thought met the market needs. Over the next three years, it was tested by 14 yarn, fabric, and apparel producers and was fine-tuned by Dow. By September, 2002, Dow was ready to launch XLA and began working with spinners and weavers to create fabrics using the fiber. Earlier this year shirts with XLA by Calvin Klein, Perry Ellis (PERY ), and Tommy Hilfiger (TOM ) showed up in U.S. department stores, where shirtmakers say they're getting an enthusiastic reception. And Dow has invested $30 million in a plant in Tarragona, Spain, where it plans to start production in a few months.

Dow pioneered reverse innovation back in 1991 when the plastics unit was in a rut. It hadn't had a single new product in three years, so Swogger paired Dow's technology for creating "designer" polymers with an intense customer focus. Today, Dow plastics moves four times the volume and achieves nearly three times the sales it did in 1991. Dow continues to spend about $1 billion a year on R&D but as a percentage of sales, research costs have fallen from 7% a decade ago to 3% in 2003. Customers may not always know exactly what they want, but every once in a while even scientists can learn a thing or two by asking them.

By Louis Lavelle in Freeport, Tex.

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