Speech by Karl-Ludwig Kley
Chairman of the Executive Board of Merck KGaA, Darmstadt, Germany
Held at the annual dinner of the Industrial Club of Düsseldorf
Düsseldorf, November 13, 2014
– Abridged version –
Ladies and Gentlemen,
Germany recently commemorated the fall of the Berlin Wall 25 years ago.
Today, Germany is almost single-handedly propping up the eurozone’s economic results. Tax receipts are rapidly setting new records. The level of Germany's export surplus regularly makes international headlines. But it needs to be clear to us that our current success reflects past decisions. Our future position depends on the course we set today.
And there are a few things that worry me.
- Last year, for the second time in a row, a non-European company registered the highest number of patents with the European Patent Office. It was Samsung. One-third of the patents applied for in Europe originated in Japan, China and South Korea.
- The world of the Internet, a key driver of innovation, is dominated by U.S. companies. This is also relevant to the topic "Internet of Things", because we need not only industrial strength – which we already have – but also digital expertise and impact. And that's where we have major deficits.
- Last but not least, economic success makes politicians complacent and allows the focus to be shifted to redistribution politics. Mothers are happy about the extra pension money as part of the “mothers’ pension”, physically fit early retirees are happy about the possibility of receiving their full pensions at the age of 63, and proponents of quotas are happy about the quota for women on the boards of German public companies. These are not ways to set the course for a high-performance innovation location.
What preconditions does Germany need to meet in order to succeed through innovation? Contrary to standard practice, I will answer these questions by speaking to you directly about experiences within the company I work for. We operate in a variety of different businesses. But one thing unites them all: Innovation is indispensable. We are confronted by constant change and technological progress. To us, remaining idle means falling behind. In our busineses, it is not possible to succeed through economies of scale. Our opportunities lie in our permanent focus on innovation.
What does this look like in practice? How do we come up with innovations? For the future of the company, this is the decisive question.
Avid readers of the Harvard Business Review will find articles with titles such as "How to Build the Processes That Support Innovation". Or they will come across sentences such as, "Remember that innovation, like any other important organizational process, can be managed. There are good resources that can help you build a repeatable process.” In this microeconomic literature, as well as in most discussions on innovation, the focus is on creating the structures and processes necessary to make the delivery of innovation reliable and plannable.
This fixation on processes is understandable, but also problematic. Why? Allow me to share three innovation stories from within my own company to explain.
In 1888, Friedrich Reinitzer discovered liquid crystals, fascinating the chemical research community. But it was not until the1960s that the optoelectronic effects of liquid crystals were discovered, thereby opening up options for a practical applications. The young scientist Ludwig Pohl at Merck KGaA in Darmstadt, Germany was convinced that this discovery was a breakthrough. He understood that these molecules can be used for display purposes.
He turned his back on the research fields for which he was responsible, conducting liquid crystals research instead. He operated more or less in the underground and sought out only a few early converts as allies. They did not form a major research unit, but more of a guerilla effort. However: He succeeded in convincing two important people of his ideas: the research director and the executive board member responsible for research. They protected the young scientists, and especially their budget, and allowed them to carry on with their work.
Nevertheless, there is no shortage of resistance, for example from the sales department. The overriding principle there was: If something cannot be sold in ton volumes, it’s not worth our time. But the first liquid crystal displays were used in watches and pocket calculators, meaning that the quantities of the required crystals were rather low. Circumventing the sales force, Mr. Pohl approached customers directly.
The calculator displays were followed by small displays for tamagotchis, then televisions and computer displays. At some point, even the last person realized that liquid crystals were the future. At this point, we were already actively shaping that future.
And the innovations continue today. By now, everyone is familiar with touch panel displays or 3D imaging. Curved displays are now the latest fashion. We are coming up with further developments and our work is innovative. This incremental innovation can be organized into processes. But without Ludwig Pohl and his civil disobedience, none of this would have been possible.
The second innovation story takes us from liquid crystals to Japan. More precisely, to Onahama, in the 1990s. During a visit to Darmstadt, the Head of Research, Katsuhisa Nitta, saw that iron and aluminum oxide flakes could be produced by crystal growth in molten salt.
Nitta and his colleagues got to work. They neither had a project management tool nor did they conduct any market analyses, they simply had a good idea. If someone had asked them for their sales forecasts, these would have been on the modest side. It was a good thing no one asked. They also had two influential supporters who promoted the project. And when the major investments for the first plants had to be decided on, enough work had been done to convince the right people.
Marketing thought the special shine of the pigments was great, and the first customers had already indicated strong interest. Xirallic was born. Today, Xirallic is mainly used in automotive coatings. You can order the new Jaguar F-Type with a Xirallic coating, for instance.
A final example, this time from our pharmaceutical research in the field of immuno-oncology. Immuno-oncology is based on the theory that it's possible to use the human immune system to fight cancer. The idea is not new, yet not everyone believed that it could be realized.
Several years ago, our Head of Research recruited a scientist – Helen Sabzevari – who was conducting research in this field. He simply allowed her to do her work. Many within the company considered her research to be nonsense. She was really only able to keep her job because she had the support of the Head of Research and because she flew below the radar. Her team was small, as was her budget. Her office was in the basement. And when people made critical inquiries, they learned that she was so convinced of her work and so persistent that it was simply easier to let her continue.
In 2011, my Executive Board colleague Stefan Oschmann came across her basement laboratory in Boston by chance. He recognized the potential of the research and gave her a larger budget and more freedom. And Helen Sabzevari delivered.
At this point, our immuno-oncology portfolio is the most promising part of our pharmaceutical pipeline. We are currently in discussions on a partnership to further substantiate the potential of anti-PD-L1 in more than 20 potential indications. In the pharmaceutical business, anti-PD-L1 is our hottest iron in the fire. It is still too early to say what the result will be, but it's clear that Merck KGaA, Darmstadt, Germany is leading the way because a tenacious research scientist persevered and was able to convince the right people of her idea.
Three stories, three different research areas, three different decades. Yet all of these innovations have a great deal in common. The fact that they have succeeded is not the result of optimized innovation processes. All three innovations prevailed in spite of the recommendations or even resistance from the establishment within the company.
What are we doing wrong?
I don't think we're doing all that much wrong at all. Especially where incremental innovations, so the constant improvement of a product or an invention, are concerned. The example of liquid crystals clearly shows this. Whether flexible displays, water-resistant displays or 3D displays, the innovations and developments coming from our liquid crystals laboratories are meeting the needs and wishes of our customers. These incremental innovations are generating growth and cash flow, for which many companies envy us.
Incremental innovations are by no means less important. And our processes work to ensure incremental innovation. However, it's also clear that without the first pioneering steps, nothing else would have been possible.
But how does one recognize these types of breakthrough innovation? My examples show that quantum-leap innovations have three major things in common:
- There is a time for every innovation. Ideas can fail if they arise too early or too late. The discovery of liquid crystals in 1888 was too premature for industrial use. Not until 80 years later did advances in electrical engineering offer a new point of departure. Yet the right place is also important for innovation. Special support in Japan created the breakthrough for Xirallic. And sometimes even a basement helps because there are fewer disruptions.
- Innovations need the right people. The three examples I named became successes because tenacious researchers believed in them and drove them forward. Ultimately, in each example there was a scientist who defended the project against resistance, who maintained the commitment of his/her co-workers, and was prepared to risk his/her career in order to implement the project.
- Innovation needs promoters. In each one of my examples, there was someone in a more senior position in the company who held a protective hand over the project. Someone who was convinced of the potential of the work and had the foresight to be able to assess the possibilities for the company.
I recently attended the ceremony inducting two scientists into the Hall of Fame of German research. One of them was Ludwig Pohl, the 'father of liquid crystals'. The other scientist was Stefan Hell, the winner of the 2014 Nobel Prize in Chemistry.
As a post doc, Hell began questioning scientific dogma, but no one believed in his ideas. In order to finance his research, Hell sold his patent, which he had financed with savings from his grandparents. In 2000, his theory was finally confirmed in experiments for the first time. The STED microsope earned him the Nobel Prize. Researchers can use it to observe rapid processes in living cells that were previously only imaginable. Yet without the perseverance of Stefan Hell, we would have not had this breakthrough.
Hell's story – which shows that the system of state funding for research does not always recognize valuable ideas – might make some taxpayers want to despair. By contrast, as the CEO of an innovative company, my conclusion is: When it comes to assessing breakthrough innovations, the public sector appears to have exactly the same problems as we do.
I think we all agree that number of unrealized inventions should be kept to an absolute minimum. I cannot offer you a ready-made solution for how to do that. But here is some food for thought:
- First of all, we need the right people. By this I mean scientists who are passionate about their work and pursue unconventional paths. I also mean managers who understand these visions and have the courage to support risks. We need people who do not get distracted by headwinds or conventional wisdom. In other words, people who can think outside the box.
- Second, If we have the right people, then we have to let them get on with their work.
- Third: It's necessary to be open. By this I mean openness towards third parties, but also general openness towards new ideas and approaches.
- Fourth: The third point should not be exaggerated. Ideas and opinions should definitely be solicited from external sources. Decisions should not. That's because scientific advisory committees can sometimes debate innovations to death. And it's also important not to go overboard with freedom of topics. The direction of the research has to suit the company.
- Fifth: Innovation need not necessarily be a product. A few years ago, the CEO of Sigma Aldrich hired a couple of young IT specialists. Today, the company has the best e-commerce platform in the entire industry. That was the accomplishment of just a few people capable of thinking outside the box.
- And sixth: If you have the right people, allow them to get on with their work, are open to new things, and make key decisions yourself, the only remaining things you need are time and strong nerves. And money: Without a functioning business model that generates good profits and solid cash flows, attempting too much innovation is not advisable. Innovation requires patience, and there is no guarantee of success.
Ladies and Gentlemen,
When Ludwig Pohl was inducted into the Hall of Fame of German Research, I held the laudation. I thanked him for his work – and for his persistence. Today everyone knows that he was right back then. What concerns me are the young researchers whose breakthrough ideas are thwarted. Our ability to come up with innovations – whether as a company or as a country – significantly depends on our ability to identify and promote these good ideas.
Formal processes tend to be less suitable for this. What is needed instead is a sense of knowing who the right people are, as well as trust, openness, courage, time and the bit of luck that enable breakthrough innovations to become reality. Doing things without having an orderly process in place is still not very common in Germany. Yet this could be rephrased in the words of Hermann Hesse, who said: "You have to try the impossible to achieve the possible."
The anniversary of the fall of the Berlin Wall has just taken place, a historical event that no one thought would be possible. Those who experienced it should know that things are impossible until someone makes them possible. In other words: Keep your eyes open in your companies and organizations for those people who try to make the impossible happen. Let's do that everywhere throughout Germany.
And then, let people get on with their work. Support them instead of trying to control everything. It's actually very simple. And who knows, maybe someday history will be made.