The innovation challenge

Innovation remains critical for the industry but returns on R&D spend are declining. Differentiation is eroding faster, and companies are finding it harder to sustain their innovation advantage and justify R&D spends. Breakthrough molecules have become rare, leaving portfolios dominated by incremental improvements, while game-changing process innovations are seldom observed. Business-model innovation remains slow to materialize, and innovation systems are outdated—often too slow and siloed to keep pace with shifting market dynamics. Chemical players are grappling with a two-fold challenge—innovating to defend the core with incremental improvements or pushing for a growth agenda by finding the next blockbuster molecule.

Why reinvention is becoming urgent

The rules for innovation are being redefined by ongoing shifts in the industry:

• AI is transforming innovation by compressing design-to-decision cycles, improving prediction accuracy, and increasing hit rates.
• New entrants are scaling faster, shortening competitive advantage windows, and raising the bar on cost and speed.
• Sustainability and new chemistries are reshaping global value pools and redefining customer expectations.

To address the upcoming challenges, the industry needs innovations not only on chemicals and materials but also on areas that can deliver value quickly, such as processes and business models.

Rethinking our approach to innovation

Historically, the industry has relied on the following innovation models:

• Technology-driven innovation that delivers deep science but often lacks market relevance and speed
• Market-driven innovation that ensures customer focus but tends to be incremental and easily replicated

Both have strengths but neither alone is sufficient in an environment defined by speed, cost pressure, and the need for collaboration. Process innovation remains rare and is often constrained by short-term expectations that prevent sustained breakthroughs.

Innovation is still a “black box” where legacy systems are trusted to deliver results without clear performance management or strategic direction. The weak connection between innovation and sales often results in value leakage during commercialization. Sustainable innovation is frequently discouraged by static, short-term thinking that overlooks the long-term scaling benefits and potential for targeted market entry. Fundamentally, the basic principles of innovation remain the same, but methods and management practices need a reset to remain relevant in today’s environment with ongoing industry shifts. More than 90% of CEOs believe that the industry needs to rethink how innovation is managed.

Winning with a balanced innovation portfolio

Speed, breadth, and depth are essential to create a defensible competitive advantage. We see three complementary innovation plays driving leadership in chemicals:

• Sustaining innovation, or “Go faster.” Defend core markets by improving existing processes, reducing costs, and responding rapidly to customer and sustainability demands.
• Transformative innovation, or “Go broader.” Build mid-term growth through adjacent technologies, new applications, and partnerships that leverage current strengths.
• Disruptive innovation, or “Go deeper.” Pursue long-term breakthroughs—often enabled by AI and ecosystem collaboration—in materials, processes, or business models in order to redefine the industry.

The most effective innovators devote more than 60% of their R&D portfolios to transformative or disruptive innovation.

How industry leaders are redefining innovation models

Leading players are restructuring their innovation models to focus on integration, speed, and impact. They are creating connected growth systems that link marketing, R&D, sales, and operations, enabling them to act as market builders rather than market followers. This shift from siloed functions to an integrated operating model is proving decisive in improving both the speed and precision of innovation execution.

• Integration drives velocity: The most successful innovators combine strategic marketing insight, R&D excellence, disciplined sales execution, and proactive capacity management within a single, agile growth system. By breaking down functional silos and synchronizing these capabilities, they significantly accelerate decision-making, increase precision, and improve innovation speed and precision.

• AI, data, and ecosystems amplify learning and productivity across this growth cycle. Close to 90% of leading innovators say AI has improved their innovation success rate.