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37.3
2.8
R&D spending as a
percentage of gross
value added*
Steels R&D spending as a
percentage of revenue
versus EBIT margin
Steel
Electronics
Automotive
Machinery and
equipment
Chemicals
Building
materials
5
EBIT margin
Exhibit 13. Steels R&D Model Shows Low Spending and Has Little Correlation with
Margins
Sources: World Steel Association R&D Survey; BCG ValueScience Dataportal; Bloomberg; company reports; Eurostat; BCG analysis.
Note: Average R&D spending and margin, 20072009. EBIT = earnings before interest and taxes.
*
EU-25 average gross value added for individual industries.
e
d
M
e
-
t
o
o
Usually not patented
Usually not patented
Usually not patented
S
p
e
c
i
a
l
i
s
t
Exhibit 16: Industry Clusters Drive the Choice of R&D Focus Areas
Sources: Themescape; Thomson Innovation; BCG analysis.
Note: The figures enclosed in boxes indicate the number of patents filed, 20052010.
Change of patent-ling behavior...
50
Average number of patents led
450
350
0
400
5%
15%
+47%
Diversied
steel producers
Me-too players
Specialists
CAGR
Revenue ($millions)
R&D spending ($millions)
CAGR
CAGR
2005 2006 2007 2008 2009
They do selective
innovation to
expand business
reach
They broaden
their portfolios or
become multiniche
players
...generates dynamicsespecially
for me-too companies
... and mass producers
Diversied steel producers
Specialists
M
e
-
t
o
o
p
l
a
y
e
r
s
.
.
.
Exhibit 17. Me-Too Companies Are Clearly Improving Their Innovation Position
Sources: Themescape; Thomson Innovation; BCG analysis.
Note: CAGR = compound annual growth rate.
Flexibility and Innovation 29
the globe that, in 2008, accounted for 430 million tons of
crude-steel production, 34 percent of the worldwide
total.
Some companies do not fle patent applications for all of
their innovations. Our discussions with industry insiders
point to a number of possible explanations for this.
They may wish to avoid disclosing information, or they
may regard the fling process as too expensive. Nor do in-
cremental product changes require the fling of new pat-
ents. There are also companies whose balance-sheet dec-
laration of R&D spending may not encompass the whole
of their R&D efort.
Given these provisos, it is still possible to draw some
broad conclusions about their R&D eforts. One is that al-
though established companies in developed Asia and Eu-
rope are above-average spenders, high R&D expenditures
do not guarantee high patent output.
It is possible to divide these companies into four broad
groups. Exhibit 18 showsin the top right-hand quad-
ranta clear grouping of companies that have a strong
R&D focus refected in both spending and innovation,
and another at the bottom lef that competes on cost ad-
vantage rather than innovation. This has to be qualifed
with the usual disclaimer about incomplete information.
It may be that the companies that appear to derive a lot
of patents from limited spending are not declaring their
entire R&D expenditure under that heading. Likewise,
those at the bottom right that apparently are getting very
little from a high expenditure may be choosing, for the
reasons listed above, to avoid the patent route.
Furthermore, this analysis of resource commitment and
the number of patents fled, together with a detailed pat-
ent map, can help steel companies get a very good under-
standing of their competitors. This could be an additional
data point in a structured analysis of the competitive
landscape.
1
10
1 10
Resource commitment
(R&D spending as a percentage of revenue)
2
Low High
Low
High
0.7% = the industry average
10,000
1,000
0.01
$473
million
$1,228
million
$1,233
million
$248
million
Strong R&D focus
Question mark
High number of patents; low spending
No R&D focus
R&D output (number of patents led)
1
81 = the median number
of patents led by
the peer group
100
0.1
0.1
United States
China
South America
India
Russia
Other Asia-Pacic
Japan
Europe
Cumulative R&D
spending, 20072009
Exhibit 18. Industry Analysis Shows Different Patent-Filing Behavior and Resource
Commitment
Sources: BCG ValueScience Dataportal; Bloomberg; company reports; Thomson Innovation; Themescape; BCG analysis.
Note: Logarithmic scale. The benchmark includes 37 companies representing 34 percent (453 million tons) of crude-steel production in 2008.
1
Total, 20052010.
2
Average, 20072009.
30 The Boston Consulting Group
Steel producers are making distinct strategic choices
that are refected in their position on the matrix in Ex-
hibit 18. What all producers in all the quadrants have in
common, however, is the opportunity to improve the ef-
fciency of their innovation initiatives by improving their
R&D operations in terms of both processes and organi-
zation.
Achieving the Optimal R&D
Setup
Our studies of the steel industry show that
there is a wide range of approaches to
R&D processes and organization. Some
companies have very formalized struc-
tures that include dedicated R&D centers of competence
for individual product lines and applications. Others are
much more fragmented, with experts carrying out R&D
alongside their daily routines.
We have also found that a company can achieve efcien-
cy and excellence no matter which industry cluster it op-
erates in or what its innovation strategy is. It is a matter
of aligning processes and ensuring that the R&D process
is organized for maximum efectiveness.
BCG has helped companies in a wide range of industries
transform their R&D operations, in terms of both process-
es and organization.
For example, BCG worked with a consumer electronics
conglomerate handicapped by a slow and expensive de-
velopment process. We helped the company devise a
four-step innovation process that used defned mile-
stones and timelines, with activities defned by fow dia-
grams and detailed descriptions of activities and output
requirements. The new approach reduced both the time
and cost of the companys development process by 50
percent.
Similarly, working with a European supplier to the auto-
motive industry, we assisted in changing the R&D culture.
Previously, the company had made long-term invest-
ments in comparatively few projects because resources
were trapped in unproftable projects that had been al-
lowed to run unchecked. The culture of the company in-
terpreted the discontinuation of a project as a failure,
with consequent efects on motivation and careers.
We helped implement a new structure in which many
more projects are initiated, drawn from a wider range of
sources. Projects go through the fltering process provided
by four stage gates and selection criteria, which are sim-
ple and transparent. Unproductive projects are halted at
an early stage, avoiding expensive investment in nonrun-
ners, and because early assessment is built into the proc-
ess, there is less fear of failure, and the
greater number of starters means that ul-
timately more ideas make it to the end of
the process.
In another example, the R&D function of
a chemical company was reorganized by
separating research from development to
make innovation more responsive to the
market. The previous structure created silo thinking, with
strategic business units having little efect on technology
platforms: product development focused on incremental
product changes that were based on customer requests
rather than on breakthrough innovations, interchange be-
tween diferent product-development groups was limited,
and there was little relationship between the strategic
business units and research platforms.
The new structure has a much stronger market orienta-
tion. Development at that company now focuses on iden-
tifying market opportunities and requests, and research
is funded by the business units. An innovation manager
acts as customer for the technology platforms while prod-
uct development managers ensure market orientation of
innovation projects. The whole system is monitored by a
commercial head and has its strategy defned by a body
of innovation managers working across the strategic
units.
Another example is provided by steels involvement with
the fast-growing ofshore-wind-power industry. Exhibit 19
illustrates how companies can seek new sources of de-
mand and use innovation to serve those demands. The
wind power market has become signifcant, and its dis-
tinctive, fast-evolving needs are driving innovation in
steel companies.
This type of innovation has fulflled demands for new
products, applications, and steel services. New products
have been designed to meet strength and endurance re-
quirements, while design innovation has reduced the
weightand therefore the costof towers. Forward inte-
A company can
achieve efficiency and
excellence no matter
which industry cluster
it operates in.
Flexibility and Innovation 31
gration has allowed the development of services, such as
helping companies that assemble monopiles and jackets
make efective use of the steel and developing special
edge beveling that is required by downstream customers.
Such forward integration and cooperation with down-
stream customers can give companies frst-mover advan-
tages and ensure direct and efcient knowledge transfer.
This particular example further underpins the impor-
tance of looking into new industries and searching for
new trends. It shows how innovation helps fnd new mar-
kets and applications for steel.
Imperatives for Steel Executives
Decision makers at steel companies can learn a series of
lessons that they can put into practice as they respond to
the demands of the modern market. Each company
needs to identify its R&D focus areas, deciding for each
innovation object (be it a product, process, application, or
service innovation) whether to be a frst mover, fast fol-
lower, or late follower. Furthermore, the company needs
to evaluate its R&D organization and processes. Do they
ft the requirements of the innovation strategy? Exhibit
20 shows the stages through which a company can devel-
op as it strives for excellence in R&D, each progression
entailing particular changes to both processes and organ-
ization. Regardless of industry cluster or innovation strat-
egy, companies can generally improve their R&D setup by
aligning their processes and organization.
Executives in the steel industry must answer some dif-
cult questions that can help them clarify their companys
approach to innovation.
Innovation Aspects of the Steel Industry:
Do we benchmark our R&D spending relative to our
competitors and other industries?
Components
with steel content
Challenges and opportunities
Innovation approaches
by the steel industry
Very high wear and tear
High maintenance and replacement
cost due to oshore installation
Gearbox and
transmission
Tower
Foundations, for
example, tripods,
monopiles, and jackets
Heaviest components aecting
total cost
Material cost
Transportation and installation cost
Tower weight also determining
foundation cost
Rough environmental conditions
Strong winds, gusts, and salty water
Additional process steps required
for the nal product
Product and application: Thermome-
chanically rolled steel with high static
and dynamic strength and toughness
Service: Forward integration to
downstream processing steps, for example,
beveling and rolling
Product: High static and dynamic
strength steel-plate material according to
customers designs
Application: Reduction of tower wall
thickness through improved design
Product: Steel with high wear
resistance and fatigue strength
according to design loads and life
cycle expectation
Application and service: Develop-
ment of quality control measures along
the supply chain, as well as
wear-monitoring procedures, including
close cooperation between the steel
and gearbox manufacturers
Exhibit 19. Steel Innovation Should Be Driven by Market Requirements
Understanding the Challenges and Developing the Respective Products, Applications, and Services
Sources: American Iron and Steel Institute; World Steel Association; BCG analysis.
32 The Boston Consulting Group
Do we understand the spending schemes and ration-
ale of our competitors?
Can we quantify the efect of our R&D eforts on prof-
itability (de-averaged by product, process, application,
and service)?
Alignment of Innovation and Business Strategy:
Do we address the full spectrum of innovation areas in
the steel industry (products, processes, applications,
and steel-related services) or do we focus on specifc
areas depending on our business strategy?
Within each innovation area, do we proactively choose
our strategy (first mover, fast follower, or late fol-
lower)?
What are the current requirements of our customers
with regard to product characteristics and service
needs?
Do we know how to beneft from global trends afect-
ing our niches (such as CO
2
regulation, electric vehi-
cles, and global mobility)?
What products do we need to develop in order to cater
to future customer requirements and newly emerging
sectors or product applications?
Which existing products might be substituted by other
materials or superior steel grades?
What are possible new market entrants (competitors,
customers, and suppliers) and how could they afect
our business?
Internal Capabilities:
Do we have the processes and capabilities to scan the
market, react to changes, and internalize the beneft?
Will our organization setup allow us to execute and
control the processes needed for efective R&D?
From our perspective, answering these questions is es-
sential for all steel executives. Succeeding in dynamic
markets means adapting to a continuously changing en-
vironment. R&D will play a crucial role in your ability to
face these challenges, and you can defne your companys
innovation strategy.
Laissez-faire
Follower
Performer
Industry leader
1
2
3
4
Stage
Low High Level of R&D excellence
R&D speed: innovation-to-cash cycle
R&D portfolio and product life-cycle management
Global R&D organization
Business model innovation
R&D eciency: cost and quality management
R&D pipeline: planning and control
Processes
Organization
Roles and responsibilities; R&D governance
Exhibit 20. Alignment of Processes and Organization with Innovation Strategy Determines
Level of R&D Excellence
Source: BCG analysis.
Flexibility and Innovation 33
T
he adoption of an adaptive strategy is essen-
tial if steel companies are to adjust to an in-
creasingly uncertain environment. A once
rather predictable world is now defned by
volatility in raw-material prices and demand
for products, as well as the shif of consumption and pro-
duction to emerging countries, especially China.
An efective strategy should anticipate, rather than sim-
ply react to, change and opportunity. Companies need to
become fully aware of all aspects of their environment
from raw-material price movements to the new self-suf-
ciencies of developing markets. We believe that becom-
ing more fexible and choosing the right R&D focus and
setup will enable steel companies to thrive.
Executives must ask themselves whether or not their
company has the requisite capabilities. And if not, how
they should go about developing them:
Is our market intelligence sensitive enough to pick up
all trends and movements, for example, from raw-ma-
terial swings to end-market movements and industry
trends?
Is our productive capacity fexible enough to ride shifs
in demand and adjust to a broad range of input mate-
rials?
Is our R&D fully alignedin terms of priorities, organ-
ization, and measurement of outputwith overall
business strategy?
A Future for Steel
34 The Boston Consulting Group
The Boston Consulting Group pub-
lishes other reports and articles relat-
ed to the metals and mining industry
that may be of interest to senior ex-
ecutives. Some recent examples are
listed here.
Creating People Advantage 2010:
How Companies Can Adapt Their
HR Practices for Volatile Times
A report by The Boston Consulting
Group and the World Federation
of People Management Associations,
September 2010
New Bases of Competitive
Advantage: The Adaptive
Imperative
BCG Perspectives, October 2009
Sustainable Steelmaking: Meeting
Todays Challenges, Forging
Tomorrows Solutions
BCG White Paper, July 2009
Beyond the Boom: The Outlook
for Global Steel
A report by The Boston Consulting
Group, February 2007
For Further Reading
Flexibility and Innovation 35
Acknowledgments
First and foremost, we would like to
thank the steel companies, research
institutions, and universities that
participated in our research and
openly shared their opinions. In ad-
dition, we would like to thank our
colleagues at The Boston Consulting
Group who contributed to this publi-
cation, including Martin Fink, Hiltrud
Gehrmann, Thomas Geike, Ingo
Mergelkamp, Marius Rosenberg, and
Alex Xie.
We also thank Katherine Andrews,
Gary Callahan, Angela DiBattista,
Elyse Friedman, Kim Friedman, Huw
Richards, Sara Strassenreiter, and
Simon Targett for their help in the
editing, design, and production of
this publication.
For Further Contact
If you would like to discuss the in-
sights drawn from this report or the
capabilities needed in such an uncer-
tain environment, please contact the
authors:
Martin Wrtler
Senior Partner and Managing Director
BCG Dsseldorf
+49 211 3011 3212
woertler.martin@bcg.com
Felix Schuler
Partner and Managing Director
BCG Munich
+49 89 2317 4234
schuler.felix@bcg.com
Roland Haslehner
Partner and Managing Director
BCG Vienna
+43 1 537 56 8132
haslehner.roland@bcg.com
Hannes Pichler
Principal
BCG Vienna
+43 1 537 56 8397
pichler.hannes@bcg.com
Nicole Voigt
Project Leader
BCG Dsseldorf
+49 211 3011 3327
voigt.nicole@bcg.com
You are also welcome to contact any
of our other regional experts:
Central and Western Europe
Filiep Deforche
Senior Partner and Managing Director
BCG Brussels
+32 2 289 02 18
deforche.fliep@bcg.com
Christian Greiser
Partner and Managing Director
BCG Dsseldorf
+49 211 3011 3519
greiser.christian@bcg.com
Per Hallius
Senior Partner and Managing Director
BCG Stockholm
+46 8 402 4420
hallius.per@bcg.com
Florian Khnle
Partner and Managing Director
BCG Brussels
+32 2 289 02 26
kuehnle.forian@bcg.com
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spindelndreier.daniel@bcg.com
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peters.philippe@bcg.com
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lecorre.jean@bcg.com
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wolfgang.meldon@bcg.com
Note to the Reader
36 The Boston Consulting Group
Asia-Pacifc
David Lee
Partner and Managing Director
BCG Shanghai
+86 21 2306 4010
lee.david@bcg.com
Arvind Pandey
Partner and Managing Director
BCG New Delhi
+91 124 459 7212
pandey.arvind@bcg.com
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Senior Partner and Managing Director
BCG Seoul
+822 399 2 502
rhee.byungnam@bcg.com
Naoki Shigetake
Senior Partner and Managing Director
BCG Tokyo
+81 3 5211 0432
shigetake.naoki@bcg.com
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