Leadership Spotlight

Putting Theory to Work at Dupont

Executive Education is not only a product of industry collaboration—it can also be the originator. The next pair of copresenters at the Impact Conference on innovation actually began their relationship in an ExecEd classroom.

Ian C. MacMillan, director of Wharton's Sol C. Snider Entrepreneurial Center and The Dhirubhai Ambani Professor of Innovation and Entrepreneurship, has worked with John Ranieri, now vice president and general manager of DuPont Bio-Based Materials since 1996. The two met when Ranieri was a visiting fellow as part of Wharton's Advanced Management Program, the intensive five-week Executive Education program offered to highly qualified senior managers.

Ranieri has utilized and developed entrepreneurial management structures that more effectively develop and lead transformative growth opportunities in an environment where information, speed, and adaptability are of critical importance. As an example, a real options framework developed by Ian MacMillan was applied to more effectively assess and maximize a portfolio's valuation. The idea is that a small upfront commitment for the initial stages of new product development is a "real option," similar to a financial option. Investors have a choice to make larger investments in later stages if the technology successfully passes early tests. The system was further elaborated for greater adaptability, to maximize capital leverage, and to develop partnerships that are accretive in value.

Ranieri further allocated his investments in an "opportunity portfolio"—a concept introduced by MacMillan and Columbia's Rita Gunther McGrath, GrW'93, in their book, The Entrepreneurial Mindset. Picture a matrix with two axes: technological uncertainty and market uncertainty. Projects with low uncertainty in both dimensions are Enhancements—new products that generate incremental revenue by improving or finding new applications for existing products. Those that have high uncertainty in both dimensions are Stepping Stones—high risk but with the potential to transform both technology and the marketplace.

Organizing investments in this manner and using options- based management and financial systems assures that both winners are identified in a timely fashion, while projects that are not market-valid or technologically feasible are stopped before they become too costly.

MacMillan and McGrath advocate establishing a strategy, structuring an opportunity portfolio that supports it, then employing adaptive execution (i.e., learning along the way through the use of real options).

In 2002 Ranieri, who holds a PhD in medical sciences, joined the unit of DuPont charged with creating greener energy sources and materials using biology, chemistry, materials science, and engineering. Two years earlier, DuPont Chairman & CEO Chad Holliday had set a target for DuPont to derive 25 percent of its revenue from non-depletable resources by 2010—a lofty goal.

Ranieri mapped DuPont's projects into opportunity matrices, and the product development cycle for Bio-Based products was aligned to create a portfolio with allocations in each sector of the opportunity matrix. By understanding the overall mix, the business created new product targets that were both high value-in-use and reduced the associated environmental impact.

Instead of evaluating projects across the board, each was evaluated within its sector. Instead of embarking on massive but risky projects, DuPont used relatively small investments to gain knowledge, reduce uncertainty, and target capital investments intelligently.

Five years later, DuPont Bio-Based Materials is reaping the benefits with a dozen Bio-Based Materials business opportunities ready for commercialization in the next five to seven years.

"Real options framework changes the dynamics of the team and the questions asked," said Ranieri. "For example, here's a question that was not obvious several years ago in the biofuels market: ¡®Is there something else we could make that is superior and could be transformative? How can we have both value-added products and reduce the environmental footprint at the same time?' It turned out that these qualities weren't mutually exclusive. We opened up new large-market opportunities with the technology base, and as we learned, we found surprises along the way that weren't factored in the original valuations. We won both ways, feeding success and stopping failure simultaneously."

As an example, the answers to those questions resulted in significant new product opportunities—an integrated process that produces cellulosic ethanol from parts of the corn that were formerly waste products and partnered with Broin, and a further partnership with BP to develop biobutanol, which has advantaged performance as a fuel compared to ethanol.

"Being able to ask the right questions at the front-end of innovation is not obvious nor easy," he said. "But when you can more effectively learn and adapt, that's how you get the right answers that create significant value and transform markets."

How a Vanguard Partnership Creates a Unique Knowledge

In October 2006, the Pension Research Council (PRC) published a new working paper on trading behavior in pension plans. Just another academic research paper? Not in this case—for it arose out of a unique multi-year partnership forged between the Wharton Pension Research Council and Vanguard Group, an investment management company and one of the Center's Senior Partners.

This partnership gave PRC Director Olivia Mitchell, International Foundation of Employee Benefit Plans Professor and professor of insurance and risk management, and Takeshi Yamaguchi, a doctoral student in insurance and risk management, an opportunity to conduct real-world empirical research on the behavior of 401(k) plan participants. It also gave them two co-authors—Gary R. Mottola, a researcher at the Vanguard Center for Retirement Research with a PhD in social psychology, and Stephen P. Utkus, WG'84, the founding director and principal of the Vanguard Center whose deep interest in investor decision-making began during his years at Wharton.

While Vanguard was a long-time member of PRC's 24-company advisory board, a ground-breaking research collaboration grew out of an Impact Conference on behavioral finance, which both Mitchell and Utkus co-organized in 2003.

"Our conference looked at the psychological and socio- logical, as well as economic determinants on behavior," said Mitchell. "Yet coming out of the conference, we recognize that little in behavioral finance focused on real-world investment decision-making in retirement plans. There was information from other fields—not pensions—that people traded too much and were unduly influenced by what their coworkers told them around the water cooler—not the determinants that financial planners would even consider in the decision-making process. We wanted to see how these apply to pensions."

Vanguard was the perfect partner. "Research collaborations with industry depend on an individual who wants to get involved and who champions the project," Mitchell explained. "Steve was unique in understanding how academic research applied to his company."

The Vanguard Center for Retirement Research was created in 2001 and has been led by Utkus since its inception. It was established as part of the Institutional Investor Group at Vanguard overseen by managing director Bill McNabb, WG'83.

"In the early days of formulating our research agenda, Bill and I were talking about the question of 401(k) trading," stated Utkus. "We knew that only a few participants traded, but some did so actively, and we were wondering whether they were actually making money or possibly undermining themselves and their retirement security by trading excessively. Over time I attended several of Olivia's PRC conferences and also became involved with the PRC advisory board."

When the 2003 behavioral finance conference revealed a gap in the research, the researchers of Vanguard and PRC decided to pool research efforts to look at 401(k) trading.