DSM Chief Executive Officer Feike Sijbesma refers to Charles Darwin when talking about his company’s transformation. “If you don’t adapt, you won’t survive,” he told an international press group over dinner last month.
He said it is his training in biology and belief in natural selection that convinced him that such adaptation was necessary for the long-term survival of his company.
In the past 10 years, DSM has transformed itself, shifting its portfolio from petrochemicals and specialties to life sciences and materials. Since Sijbesma joined DSM’s managing board in 2000, the firm has divested more than half of its businesses, in the process boosting the life sciences portion of its portfolio threefold to 40% and raising its sales in nutrition 10-fold. And with the just-completed $1.1 billion acquisition of Martek Biosciences, Sijbesma has set the tone for DSM’s future expansion.
The company has come a long way since DSM stood for Dutch State Mines, in rough English translation, and was focused on coal chemistry. A rebranding launched late last month retains the DSM name, giving credit to its heritage, but little else remains of the original firm.
At the release of 2010 financial results on Feb. 23, Sijbesma declared the transformation complete. “From now on, our strategy is to grow the company that we have created,” he said. He then outlined his plans to raise profitability by one-third in the next three years by shifting sales to fast-growing regions and targeting societal trends. The transformation message is a familiar one for European chemical companies as they redefine themselves in a mature local market, but Sijbesma said the consistency with which it is applied throughout DSM will ensure success at his company.
Sijbesma had a positive message on 2010 results, which included a 20% rise in sales and a jump in operating profit from continuing business of more than 70%. The company ended the year with nearly $2 billion in cash, has begun a share repurchase program, and will up its dividend by 12.5%.
Company results also include sales from discontinued operations of $1.2 billion. Major businesses sold in the past year include fertilizers, melamine, and citric acid. The sale of DSM’s elastomers business is expected to be complete by midyear.
The investment community has responded positively to the business shift, and DSM’s stock price rose steadily throughout 2010. In a recent review of the company, UniCredit stock analyst Andreas Heine commented that the still-low value of DSM’s stock should be boosted by the continuing portfolio shift, first by disposal and in the future by acquisitions.
Nutrition, DSM’s largest business with sales of $4.0 billion, maintained the strong performance it demonstrated in 2009. The performance materials unit reported much improvement over the recession-impacted results in 2009, with sales up 31%. Sales in the polymer intermediates sector, which includes major products caprolactam and acrylonitrile, were more than 60% ahead of 2009 as the market recovered strongly. The unit posted a record operating profit of $255 million and ran at maximum capacity through most of the year.
DSM’s pharma business, which makes antibiotics and other pharmaceutical chemicals, is the only unit that still performs below target. “We need to take strategic actions,” Sijbesma acknowledged, pointing to the company’s pending joint venture with Sinochem. The planned 50-50 venture, which is awaiting regulatory approval, combines DSM’s anti-infective technology with the distribution network of Sinochem to expand in China and other high-growth countries.
“All of the growth is driven by Asia,” explained Stephan B. Tanda, managing board member for pharma and nutrition, “where anti-infectives are often the first and only line of defense. They grow with the wealth and population of the country, so this partnership puts us on the right track for improvement in that business.”
Tanda admitted that the small-molecule pharmaceutical business has been the most challenging. Like others in the field, DSM is shifting to generics and working to move its asset base to the East.
This move toward Asia is also a primary objective for DSM as a whole. Targeting high-growth economies is one of the four major thrusts that the company expects will raise sales and profitability to new levels in the next five years. Innovation, sustainability, and acquisitions and partnerships are the other three DSM “growth drivers.”
The company plans to boost its business in high-growth economies to more than half of total sales, up from 37% in 2010, and to double China sales from $1.6 billion in 2010. In addition to the Sinochem joint venture, other supporting activities include engineering plastics and feed partnerships in Russia, manufacturing collaborations in Turkey and India, and a new composite resins facility in China.
In 2010, CEO Feike Sijbesma was awarded the United Nations Humanitarian of the Year Award for his leadership in corporate social responsibility. In 2007, Sijbesma initiated a partnership with the UN World Food Program, providing it with micronutrition packets for food aid packages, expertise in nutrition and logistics, and direct financial assistance. The partnership was renewed for an additional three-year term in 2010.
Sijbesma is quick to point out that he represented the entire company in receiving the UN award. “It was a personal prize,” he says, “but it was due to the work that DSM does.” He adds that the recognition has been a great motivational tool for employees, engendering a sense of pride in the company.
DSM’s participation with the UN program grew out of Sijbesma’s involvement in the World Economic Forum in Davos, Switzerland, where he learned about “hidden hunger,” a condition where people have enough food to stay alive but not enough vitamin and mineral input to be fully physically and mentally healthy. The condition affects 2 billion people and claims 10 million lives annually, according to the UN.
Sijbesma is hesitant to discuss his personal feelings, but it is clear he has an emotional attachment to the initiative that has cascaded to DSM’s employees. In 2010, more than 2,300 employees participated in the World Food Program “Walk the World” fund-raiser, and 10 employees took volunteer assignments in Zambia and Mozambique.
Although the effort is about doing good, Sijbesma also stresses the business value. “It helps shareholders to have more motivated people,” he says. “Also, if the world economy grows and those countries are doing better, then it helps DSM.”
DSM has high expectations for innovation, its second growth driver, because of its successes in achieving previous targets, which date back to 2006 when the company added a chief innovation officer (CIO) and targeted $1.3 billion in new business sales from 2006 to 2010. “At the time, we did not even know what our sales in new business were because we did not have the metrics,” CIO Rob van Leen said. He eventually determined that the cumulative new business sales for 2001–05 was less than $800 million, showing that the new target was a significant stretch. Yet DSM surpassed it, delivering $1.7 billion of new sales from 2006 through 2010. “It means that we were able to speed up the whole innovation machine,” van Leen said.
DSM has found many new business opportunities by considering how technology from one business applies to another. Executives call it the “X factor” and host an annual competition to encourage technical and market developments between DSM businesses. The most recent success is the use of a polymer-based biomedical material that allows the slow release of medication for macular degeneration. “We use our knowledge of biotechnology and pharma to package an intelligent polymer for a specific need,” van Leen said.
He pointed out that innovation is not only about new science but also about new business models. He cited a low-reflective coating for glass called Claryl. Currently, DSM makes a finished coated glass for picture frames, but a stand-alone business is not its long-term intent. “Nobody wanted to pay us for the technology in the beginning, so we coat glass and sell it to make a point,” van Leen explained. He expects that DSM will eventually exit that business and focus on solar cells, greenhouses, and other industrial uses that will license the coating technology.
DSM is currently working on three new business platforms—biobased products and services, biomedical materials, and advanced surfaces—and has set a target to raise new business sales from about 12% of overall sales in the past five years to 20% through 2015.
Sustainability is the third growth driver for DSM. In the past, the firm referred to sustainability as a responsibility and discussed its efforts in a separate annual report. Beginning with 2010, sustainability was rolled into the company’s main annual report. Sijbesma said the consolidation is consistent with the change in portfolio. Much more of DSM’s business has an impact on quality of life, he said, so it follows that sustainability and business targets begin to overlap, although the sustainability targets are referred to as “aspirations.”
Sustainability aspirations for 2015 include achieving top ranking on the Dow Jones Sustainability World Index, boosting sales of products with improved life-cycle footprints, and lowering greenhouse gas emissions and energy use.
Progress on these targets will have an impact on remuneration for senior staff. “We have a triple bottom line for the company and the leadership,” Tanda said. “From this very high level concept, it gets boiled down to very tangible targets that not only impact compensation of the managing board but also senior leaders,” who include the top 400 employees in the company. Part of compensation for these executives is also correlated with employee satisfaction and staff diversity, with a particular focus on nationality mix.
The fourth growth driver is acquisitions and partnerships. In the past year, major DSM purchases included biomedical materials company Polymer Technology Group, nutrition firm Microbia, and personal care chemical supplier Pentapharm. DSM swapped its polycarbonate business for Mitsubishi Chemical’s polyamide business. It also set up joint ventures with Crucell in biopharma and DuPont in biomedical materials.
Much of the deal-making effort is about filling gaps in business and technology platforms, such as the acquisition of Taiwan’s AGI to expand technology in ultraviolet-light-curable resins or the succinic acid joint venture with Roquette that builds on DSM’s fermentation platform, van Leen said.
The $1.1 billion Martek acquisition adds a new platform to the company, providing microbial polyunsaturated fatty acid technology and access to the infant nutrition market, particularly in the U.S.
But more than building any program, Sijbesma and his leadership team have been working to change the culture of the company to fit the new businesses and the growth model. “We were used to selling white powder in big bags for just a little more than it cost to make it,” CIO van Leen said. “That is not a model that we want for the future.”
By linking the business objectives to sustainability and the social image of the company, Sijbesma explained, employees are more motivated and productive. “With DSM, there is a tremendous emotional attachment to the company,” he said. “I personally think that it is important the way we communicate to link them, to motivate them, to engage them to be proud of our company.”
And he applies these soft concepts when evaluating new acquisition and investment opportunities. “When we invest in a company,” Sijbesma explained, “I not only want to know the financial figures but I also want to know the culture, the flavor of a company … the softer things.”
Similar words can be used to describe what he is working to achieve at DSM: human engagement that delivers hard numbers. The good news is that, at 51, Sijbesma is relatively young for a CEO. Presumably, he has quite a few more years to cement the business and cultural change and ensure the long-term survival of DSM.