Strategic View of the Agrochemicals Market

What Strategies do Agrochemicals Companies Follow?

In this strategic overview of the agrochemicals sector, CPL Business Consultants has reviewed the historic strategies of companies like Bayer Cropscience, Syngenta, BASF and Corteva to give some insights into how the sector has evolved.  You can find case studies of some of our strategy engagements for agrochemical companies under Bioagriculture and Crop Protection in the Sector Expertise section of this website.

Organic Growth

In response to declining sales in the late 1990s and early 2000’s nearly all major agrochemical companies adopted an organic growth strategy. They achieved this through investment in R&D, new product technology distribution alliances, manufacturing plants and overseas subsidiaries. There was also considerable horizontal integration to gain market share and new products. Carve-Outs and Consolidation Many companies operating in several sectors (e.g. chemicals, pharmaceuticals and agrochemicals) sold off their agrochemical divisions as part of a strategy to focus on the core businesses.

This was due to the perception of agrochemicals as ‘unprofitable’, especially compared to pharmaceuticals. Dedicated agribusiness companies, therefore, emerged from an agrichemical industry once dominated by mixed petrochemical, chemical, pharmaceutical and agrochemical giants. Anti-trust regulators enforced product divestments from newly formed companies as the industry consolidated. This created acquisition opportunities for smaller companies as an easy route to broaden their product portfolios. There has been significant historical consolidation in the agrochemical industry. Only 10 of the 20 companies that existed in 1980 were still active in 2000. Also, the number of companies controlling 80% of the market halved, from 14 to 7, between 1990 and 2000. There was a trend towards the disappearance of mid-sized companies in the M&A process rather than a decrease in the number of smaller companies.

Generic Strategy in the Agrochemical Industry

• Technological substitution
• Demographics (e.g. changes in industry life cycle stage of industries served)
• Shifts in market needs

In a high-tech sector, technological substitution may often be a significant driver. For example, one might have expected that ag-biotech was a threat to conventional agrochemicals. More recently there has been an increase in the adoption of biopesticides. Response strategies to industries, such as agrochemicals, threatened in this way include:

• Doing nothing
• Monitoring new developments
• Fighting new technology (in the courts, in the press)
• Increasing flexibility and responding to developments
• Avoiding the threat by decreasing dependence on threatened sub-markets
• Investing in improving the ‘old’ technology
• Maintaining sales through promotion and price cuts
• Participating in the new technology

Growth Strategy for Agrochemicals

Growth strategies followed in the agrochemicals industry include organic growth, horizontal integration (M&A), vertical integration and strategic alliance.

Organic Growth

Organic growth relies on successfully outperforming the competition. Three generic strategies for outperforming competitors include overall cost leadership, differentiation and focus. Generic manufacturers pursue a cost leadership strategy, whilst innovative firms follow a differentiation strategy (reliant on high R&D inputs).

A focused strategy concentrates on a single market group, for example, pheromones and mating disruptors. The high sunk costs and associated economies of scale and scope in agrochemicals favour horizontal acquisitions. ‘Non-rival goods’ such as R&D expenses, regulatory expenses and intellectual property do not need to be increased to increase output. The large sunk costs also tend to favour consolidation.

A further force leading to consolidation is a lack of product innovation (i.e. a weak product pipeline). This may lead firms to acquire products through M&A rather than innovate themselves.

Vertical Integration

Vertical integration became more important as a strategy in the agrochemical industry. For example, this included the acquisition of complementary seed and biotech products by companies that previously specialised in agrochemicals. Factors that influence vertical integration include the availability of complementary products and Intellectual Property Rights (IPRs).

Strong demand for complementary products will also increase the likelihood of vertical integration. Companies are likely to enter into strategic alliances where IPRs are well defined, and transaction costs (e.g. for negotiating and maintaining contracts) are usually low. Conversely, companies will favour vertical integration, through acquisition where IPRs are not clearly defined (i.e. the IP is not well protected).

Strategic Alliances

Motives for strategic alliances in agrochemicals include improving the appropriability of innovation, reducing associated costs and risks and blocking competitors. Other motives include accessing complementary assets and markets (acquiring market knowledge, overcoming barriers to entry, achieving economies of scale).

Escalation Strategy

An escalation strategy may be profitable in industries with a high degree of product substitutability and economies of scope. In some agrochemical industry sectors (e.g. maize insecticides), there was a high degree of substitutability with ag biotech (genetic modification) technology on the demand side. There were also economies of scope in terms of R&D spend on the supply side. The escalation strategy involved investing large amounts in R&D whilst simultaneously engaging in mergers and acquisitions to ‘leapfrog’ competitors and gain a dominant market share.

Technology-Based Strategy in Agrochemicals

Product Strategy

A company’s product strategy is at the heart of the overall company’s strategy. Five broad strategies commonly found in technology-based industries such as agrochemicals are: leader, fast follower, late adoption, specialist and combination.

Leader

In the leader strategy a highly innovative agrochemical firm attempts to create a temporary monopoly by creating a novel product that is the first of its type on the market, inaugurating the product life cycle. The company can then realise premium margins through pricing high (‘skimming’), or penetrate the market by pricing the products low relative to the competition. This strategy requires state-of-the-art R&D facilities and usually a substantial R&D investment. Therefore, this is a financially risky strategy.

Fast Follower

The fast follower enters the market early in the growth stage of the product life cycle. The innovative leader’s product is copied and improved using fast, flexible and responsive R&D, learning from the leader’s mistakes. This strategy relies on an agrochemical company’s effective marketing skills to win customers away from the innovator.

Late Adopter

Late adopters copy an existing product and enter the market during the growth stage, or later in the product life cycle. Generic manufacturers of agrochemicals follow a similar strategy. By leveraging skills in process development, volume production, organisation and distribution, overheads are minimised, and economies of scale achieve a cost advantage.

Specialists

Specialists adopt existing products and adapt them to small (specialist) market segments. This strategy required strong skills in R&D for product design.

Combination Strategy

The combination strategy employs two or more of the strategies above. For example, an agrochemicals company may a adopt a strategy to be a leader in some key products for which it has specialist R&D expertise but may also be a late adopter for other products contributing to its portfolio.

Agrochemicals Innovation and R&D Strategy

Conventionally, R&D spending reduces as an industry reaches maturity or decline. An unconventional view is that increased R&D spending is essential to rejuvenate a declining industry. Companies that spend more on R&D in difficult periods reap benefits from improved products and processes, leading to higher profits. In a survey of European agrochemical and other chemical firms, the three most important objectives of innovation cited were to increase and maintain market share, improve product quality and reduce process costs in a cost-leadership strategy.

In theory, successful innovation reinforces a firm’s size and market power. Innovation improves firm performance in three specific operation areas, process, product and organisation. Process innovation exploits economies of scale, reducing manufacturing costs. Product innovation creates profits through the discovery and patenting of new products with improved performance characteristics. Organisational innovation reduces costs by exploiting economies of scope. Additionally, ‘market innovation’ is concerned with identifying new (better) markets and new (better) ways to serve target markets. Changes in the supply/distribution networks would be classified as organisational innovation.

Product Innovation

Product innovation in the agrochemical industry operates within a framework determined by the interaction of the regulatory system (i.e. field tests to prove efficacy, toxicology and environmental tests to prove safety etc.), patenting system and market competition. As a result, in Agrochemicals in Europe product innovation accounts for a higher proportion of total R&D spending than any for other chemical industry sectors. Agrochemical companies can follow a strategy based on sales of generic products, a strategy based on the sale of branded products containing innovative compounds, or a combination of the two.

Patent-protected proprietary (branded) products accounted for approximately 35% of products in 2000, 35% were off-patent proprietary products, and 30% were generic products. Generic compounds are generally 25% cheaper (for consumers) than branded products. During the last decade, the number of independent generics producers increased considerably as more and more compounds became ex-patent. In addition, the increasing regulatory requirements, which led to the withdrawal of many older agrochemicals, as well as the price premium for novel products and the ability to differentiate through innovation stimulated the hunt for new active ingredients.

Research & Development

Finding new, effective compounds is becoming increasingly difficult and expensive. Between 1975 and 1995, screening costs increased by 369%, and chemical development/formulation costs increased by 150%. In the same period, field-testing costs rose by 233% and toxicology, residue analysis metabolism, and environmental studies by 1150%. There is also a trend towards greater product specificity and more complex (expensive) synthesis.

In 2000 the estimated cost of bringing a new active ingredient (AI) to market was €150m. Firms may seek R&D alliances to reduce costs. Collaboration is often the best option for R&D, especially for smaller companies that cannot afford R&D costs themselves . The use of strategic technology partnerships (STPs) increased; for example in 1996, Hoechst invested US$ 90m in STPs. However, joint ventures are less likely where the protection of intangible assets is important to the firm.

R&D has become increasingly focused to achieve as high a ‘hit rate’ as possible for novel compounds. One approach, termed ‘patent buster’ or ‘me too’ is to look for chemical analogues of existing novel compounds. Innovators have also designed molecules to act on particular molecular targets or to mimic naturally occurring compounds with known pesticidal properties. The use of advanced screening technologies has augmented this.

To protect their R&D investment, innovative companies must fight generic competition through effective patenting, regulatory and marketing strategies. Up to 10% of the total R&D spend may be on product support and defence. Agrochemical companies develop patents with as greater scope as possible, usually covering all possible derivatives of the AI. This acts as a deterrent against ‘patent busting’ effectively hiding the favoured AI from competitors. Further patents (e.g. processes etc.) can build up a ‘patent wall’ to protect the AI.

Process Innovation

Process innovations can make manufacturing less capital-intensive, increase economies of scale, and change the proportion of fixed costs. Innovative processes may be used not only to lower costs but also to protect a product from generic competition. As part of their strategy, agrochemical companies may use process patents (e.g. for isolating isomers of a racemic mix) to protect an active ingredient (AI) from generic competition. If the patented process is cheaper than other methods, this will prevent generic competition. If a generic manufacturer’s process results in an AI with different impurities from the branded product, a new set of regulatory data may have to be submitted.

Organisational Innovation

Organisational innovation exploits economies of scope by changing the organisation’s structure to reduce costs. Developing and structuring internal resources innovatively can lead to a hard-to-replicate differential advantage. For instance, in MNEs centralising R&D may lower R&D costs. However, decentralising R&D units support market penetration or expansion (as decentralised units interact with the locality and acquire local knowledge). Finding the right balance of autonomy and central control for activities such as R&D and marketing units is important in this context to gain optimal strategic advantage.

Agrochemicals Marketing Strategy

Distribution is highly consolidated in agrochemicals. Farmers rely on advice from the distributors’ agronomists for their crop protection needs. By producing specialised formulations for specific distributors (with their labels), which allow agronomists greater choice (e.g. with increased AI concentrations), agrochemical companies can build up longer-term distributor relationships. The agrochemical industry has moved from a product-centric to a customer-centric industry. By using a strategy of linked marketing arrangements with the distributors, in which distribution companies agree to sell a balanced product range, agrochemical manufacturers can increase sales of their off-patent (older) products. Producing slightly different formulations for different countries under the same trade name allows differential pricing. Parallel import regulations prevent the movement of non-identical products for safety reasons, allowing manufacturers to charge different prices in different countries. Strategic pricing of this type is typical of a non-contestable industry with significant sunk costs and a low threat of entry.

Intellectual Property Strategy in Agrochemicals

Patenting

Agrochemical manufacturers can also support sales of their older AI portfolio through the use of ‘composition of matter patents’. The commercial life of the off-patent, AI can be extended by patenting a synergistic mixture with an on-patent compound. This may also be achieved by differentiating off-patent AIs from generics by using safer formulations and delivery systems. Patents are usually granted for 20 years in the UK, and up to eight years may have elapsed before registration is complete. Therefore, it is essential for agrochemical companies to have a strategy to optimise registration times to increase the on-patent sales period of a product.

Regulations

All formulations must be registered in the country or region in which they are sold, whether novel or generic. Submitting a registration package containing chemical, efficacy, toxicological and environmental data is extremely expensive, time-consuming, and a significant barrier to generic manufacture. Some data may be available from the public domain from the original registration but can only be used if a generic formulation is exactly the same as the branded product in every respect.

Agrochemical companies may adopt a strategy to join together to form ‘task forces’ to register generic formulations, splitting the cost between them (e.g. based on market share). A generic compound registration has to replicate the data used to register the original branded product. A new product can be protected by carrying out as multiple regulatory tests. This makes the registration cost for a generic version prohibitive for a smaller company when the patent expires.

Finding the Best Strategy

CPL Business Consultants has completed many strategy engagements in crop protection and bio-agriculture. This includes work on biopesticides, fertilizers and bio-fertilizers, crop protection products such as pyrethroids, and genetic approaches.

CPL is able to assist you in making the best strategic choices, with clear and practicable recommendations backed up by detailed fact-based research and authentic insights. Please contact us to discuss your specific challenges and needs.

Not all topics covered are shown in our case studies, so please contact CPL for further details. Have a look at CPL Business Consultants PowerPoint Introduction and Brochure describing deliverables, differentiators and case studies. You can also review Eight Case Studies