R&D Times Two

Today's spate of mergers and acquisitions often requires companies to combine R&D functions. Some recent mergers provide models for other manufacturers.

While all departments of merging companies must blend and integrate, R&D faces unique challenges and opportunities. In fact, some R&D executives believe a merger or acquisition is the time to actually exploit chaos, break momentum, and make the sweeping changes to organization, process, structure, and culture that are not possible under normal conditions. "It's an opportunity to make changes that are difficult under constant and stable conditions, a chance to reinvigorate the R&D function. Don't miss it," says Tom Honohan, vice president, integration, drug innovation and approval, Aventis Pharmaceuticals Inc., a Parsippany, N.J.-based unit of Aventis SA. Such an opportunity arose when the pharmaceutical and agricultural businesses of Hoechst AG and Rhone-Poulenc SA were merged at the end of 1999 to form Aventis, the $21 billion worldwide life-science powerhouse with global headquarters in Strasbourg, France. In the process of integrating the R&D functions of the two pharmaceutical organizations, the new company pared and refocused its combined new-product pipeline, structured its R&D department in a way new to both companies, and created systems to track cost-saving synergies that are still active today. As more and more industries consolidate, and companies look to mergers and acquisitions as a growth strategy, they inevitably will face the same challenges and opportunities as Aventis and other companies that have merged and made acquisitions, including DuPont Teijin Films, Exxon Mobil Corp., and Rohm and Haas Co. They offer lessons for other companies that rely on innovation investments for future growth. Like other departments in merging companies, the first orders of business in R&D are maintaining current projects and customer relationships as well as addressing the personal and professional needs of the people involved in the merger or acquisition. But in R&D there are issues encompassing integration of intellectual property, mining project and product portfolios for duplications and synergies, and hybridizing innovation processes and cultures. Prioritizing Projects One of the immediate priorities in integrating R&D functions is to retain key people, in whose heads is lodged most of the intellectual property of the company. At Aventis, the framework for personnel and most other decisions was established by prioritizing the projects in the combined new-product pipeline. In the pharmaceutical division, each was ranked as top, middle, or low priority, based on financial criteria and market and medical need. All low-priority projects, more than 10% of the total, were stopped immediately. All high-priority projects were fully funded, no questions asked, while all middle-priority projects were funded up to the next decision point. Once Aventis identified key projects, the task of selecting key people to support them was much simpler. "Immediate prioritization of projects helped us focus everyone's energy on the top and middle priorities, and a lot of energy was expended to communicate those decisions to all members of the new Aventis R&D team," says Honohan. "In our previous combined experiences, there was less focus and less communication of priorities to staff. As a result, a lot of projects mysteriously kept going that should have been stopped. I think the staff felt very good about it as well, because even under stable conditions people feel overworked. I think this was a good credibility step, saying we know the merger will have some negative impact on productivity, so let's face this and just stop some of the projects." Not to be overlooked is the importance of providing clear direction very early in the integration. "Scientists look for logic and overall unifying theory," observes Honohan. "When it comes to integration, some decisions result from the need for speed. Given the turmoil of integration, it is difficult to communicate adequately, completely, and in a timely fashion to demonstrate that there is a strategy with which the vast majority of decisions are consistent. This is possibly . . . something unique to R&D." Helping people feel comfortable and valued in this time of transition was the purpose of an online strategy at ExxonMobil, Clinton, N.J. "People are uncertain, [they're] going through a major personal change," says Alfredo Lopez, ExxonMobil's vice president, R&D, who helped engineer the petrochemical megamerger in 1999. "You get every single headhunter in the business contacting people, offering them jobs, so you have to move fast and control the rumor mill." When the two companies merged, the technology organizations were combined in a ratio of two-thirds Exxon to one-third Mobil, reflecting the approximate size difference of the two enterprises. Staff was reduced by 1,000 (about a third of the combined R&D workforce), four of eight major R&D facilities were closed, and 40% of personnel were relocated. To better understand the anxieties and concerns of the technology staff during the integration, management monitored public-forum discussions on the Internet. "There were places like Yahoo with chat rooms to talk about the Exxon/Mobil merger," says Lopez. "In the evening we followed those discussions. Some of the things being said were really crazy, some not that far off the mark. So we familiarized ourselves with what people were saying, and then addressed those concerns." While seemingly in the same business, Exxon and Mobil did not find many areas of similar technology within the two companies, but did find synergies. Exxon was very strong in process technology, for instance, while Mobil had expertise in lubricants as well as catalysts, an R&D area that the combined company immediately adopted to strengthen its patent position in converting gases to liquids. Less is More When it acquired Morton International Co. in 1999, Rohm and Haas looked for synergies in order to capitalize on new opportunities. "We quickly went through all the technical problems in each unit and looked for answers or approaches in other units," says Bob Wood, director, technology planning, at Philadelphia-based Rohm and Haas. In one case, Rohm and Haas was able to make rapid product improvements by adopting Morton International's proprietary monomers. At DuPont Teijin Films -- the $1.4 billion, 50/50 joint venture of Du Pont & Co. and Japan's Teijin Ltd. completed in January 2000 -- the search for synergies unearthed products and processes that could not have been achieved individually. However, Rohm and Haas' Wood and other R&D executives caution against capitalizing on short-term efficiencies, cost savings, and synergies at the expense of early-discovery programs and other long-term activities. "Developing a clear understanding of the corporation and the direction of individual business units is essential," says Wood. "In the absence of a clear understanding of business strategy for the longer term, it is easy to let the balance slip to the side of short-term cost reduction." Companies confront this issue when they must decide whether or not to close facilities. For its part Rohm and Haas closed no technology sites as a result of the Morton International acquisition, although Woods admits that there could be short-term justification for shuttering some facilities. "It leaves us with a complex organization, more complex than we would like to have, but it comes from a concern for customer relationships," he says. Aventis is able to quantify savings for shareholders that result from synergies achieved in the Hoechst/Rhone-Poulenc merger. "Most companies make an announcement to the investment community that they will save X billion dollars in synergies because of the integration, but most of the time they cannot show with hard numbers and facts that they actually achieve those goals," says Honohan. Corporate-wide, Aventis created 150 integration projects after the merger and was able to measure their effectiveness through reduced staff, infrastructure savings, and productivity improvements. Integration managers within each function, including R&D, set up the projects, reporting results weekly via an electronic tracking system. The integration plan extends for three years to 2002, but R&D achieved 80% of its synergy goals in the first year. Major savings were realized in closing one R&D facility and consolidating and renegotiating agreements with outsourced contract-research organizations, biotech companies, and other partners. Today tracking data are consolidated quarterly, and results are still used as a management tool. "We want to keep ourselves in the integration mentality, keep the change happening at a rapid rate," says Honohan. Prior to the Exxon/Mobil merger, Exxon's new-product development underwent a formal stage-gate process, while the Mobil system, though not as structured, was better aligned with the company's business sectors. Also, Mobil's culture embraced more risk taking, moving projects to commercialization quickly, while Exxon projects stayed in research longer to minimize their chances of failure. The challenge, then, was to blend the merits of the Exxon structure with Mobil's speed to market. The combined company maintained the Exxon stage-gate process but "softened the front end to recognize an idea in the formative stages," says Lopez. In addition, more risk taking was encouraged. Organizationally, the company has worked to blur the distinction between R&D and new-product engineering, a page taken from Mobil's strengths in creating a smooth flow of technology to the marketplace. Technology executives also are working to create a more casual, collegial working environment to encourage creativity. Not all of the changes at ExxonMobil were received enthusiastically -- in particular the addition of more structure to the way Mobil technologists had worked in the past. "There was a lot of complaining that it was excessive," says Lopez. In addition, "A lot of people were overwhelmed by the continuing stream of a variety of new things coming down the pike." Acknowledging the problem, the R&D group slowed the rollout of new systems and procedures. "When the dust settles, I'll know how much structure we have," says Lopez. Morton International brought new ways of doing business into the Rohm and Haas organization, which sparked new thinking about R&D. "In addition to technologies and new markets, we got an expanded set of business models because Rohm and Haas had traditionally placed itself in the value chain as an intermediate supplier," says Wood. "The Morton model in many cases had business units one step down the value chain closer to the customer. From an innovation-process point of view, this requires closer contact with the customer base and much more product customization. Also, pathways of commercializing innovation are not the same for the different business models." In the new Rohm and Haas, "There has to be increased flexibility in the innovation process . . . to encourage and support investigation into new models." Universal Language Blending the multicultural mix of Europeans, Americans, and Japanese was the biggest challenge for R&D integration at DuPont Teijin Films, according to John Purdy, technology manager, pan-Atlantic region, Wilton, England. The two companies had a head start on the process from a previous, smaller venture in a recording-tape business. Still, both Western and Japanese employees were exposed to multicultural training to give them a better understanding of each others' company and values. At the senior level, consultants were brought in to help executives better grasp their colleagues' mind sets, thought processes, and decision-making styles, as well as how actions would be perceived. "Language remains a continuing challenge and requires a lot of patience and tolerance," says Purdy. Meeting participants are conscious of the need to speak slowly, avoid language subject to misinterpretation, and frequently go back over key points. Because the Japanese culture is steeped in history, form, and structure, Purdy finds it valuable to include more historical perspective, background, and context when making a presentation, for instance, and to proceed in a methodical manner. Despite the language and cultural differences, however, technology itself has served as a universal language. "If there was one rallying call that brought us together, it was the culture of innovation," observes Purdy. "It rises above even some of the multicultural aspects we have, certainly among technologists." Successful integration of the R&D functions at DuPont Teijin Films was evident when six months after forming the joint venture the company held a conference at a UK facility for global customers to introduce new opportunities resulting from the combined technologies and processes of the two companies. "In terms of bringing technologists together, there's nothing like having a date in your diary when 120 customers are going to come and visit you," says Purdy. The event drove the technology community and businesses to work together to present a common face to the external world. A similar event for 180 customers recently was held in the U.S. Merging knowledge bases posed challenges for the DuPont/Teijin joint venture. "Some of the intellectual property of each partner had been held in the past to prevent the other partner from entering the market," notes Purdy. After review, some patents were allowed to lapse, or the number of countries covered was reduced because of patent duplication. Additionally, the number of patents granted in Japan is much greater than in the U.S., observes Purdy. "They tend to patent particularly for applications rather than for specific concepts, which tend to be the allowable features in U.S. and European patent law. In our industry, a number of our competitors are Japanese," continues Purdy. "So the challenge for us was to understand completely how their patent system operates. Then we had to learn how we could translate some of the broader coverage areas into very specific patents that will be of value to us in the Japanese market [in order to be] aggressive against competition."

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