HRM 538

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HRM

: Performance Management

Jack Welch Management Institute

Winter

CPID

Strayer University−Online

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HRM 538: Performance Management – Winter

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Table of Contents

“

Strategy and Performance Management at DSM

” by Bloemhof, Marjolein;

Haspeslagh, Philippe; Slagmulder, Regine

Bibliography

HRM 538: Performance Management – Winter 20

Strategy and

Performance

Management at DSM

01/2004-51

This case was written by Marjolein Bloemhof, Research Associate at INSEAD, under the supervision of

Philippe Haspeslagh, Professor of Strategy and Management, and Regine Slagmulder, Associate Professor

of Accounting and Control, both at INSEAD. It is intended to be used as a basis for class discussion rather

than to illustrate either effective or ineffective handling of an administrative situation. Support from DSM

in assembling the information presented in the case is gratefully acknowledged. Some case facts have

been disguised for confidentiality reasons.

The authors gratefully acknowledge the financial support provided by the ABN AMRO Research Initiative in

Managing for Value.

N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT
PERMISSION. 1

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It was April 2003, and Hans Dijkman, Business Group Director of DSM Melamine, had just
attended a Business Strategy Dialogue (BSD) meeting. DSM Melamine was the global leader
in the manufacture and marketing of melamine, a chemical compound used to make highly
resistant surfaces, supplying almost one third of world demand. However, Dijkman and his
team faced significant challenges in terms of cost competitiveness, aggressive competition,
market maturity in Europe and the US, and emerging growth, particularly in China.

Business Strategy Dialogues had been introduced at DSM in the mid-

0s to help structure the
firm’s strategy development process. The BSD process consisted of five distinct phases
resulting in a thorough review of the industry, market trends, customer needs, competition and
the position of the relevant business group. In 2001, as part of its new Value Based Business
Steering (VBBS) system, DSM had also started to align its strategic planning and financial
management processes by introducing Strategic Value Contracts. These contracts contained
both performance indicators to monitor the implementation of strategy, and value drivers to
measure economic value-creation.

BSDs were initiated whenever either the business or corporate felt the need, on average every
three years. DSM Melamine was currently performing its fourth BSD at the request of
Dijkman who felt that the current ‘actively maintain’ strategy would soon fail to achieve the
financial performance targeted in his Strategic Value Contract.

Management of DSM Melamine had been discussing the possibility of pursuing a ‘grow and
build’ strategy. They felt that they had reached the limits of cost reduction and that the only
way to grow for DSM Melamine was by investing in new melamine plants. Dijkman,
however, doubted whether corporate management would agree with this change. Would they
emphasize the corporate strategy of becoming a specialties company and thus be reluctant to
invest heavily in a commodity such as melamine, or would they let VBBS principles prevail
and let themselves be swayed by Melamine’s financial track record?

From State Mines to Specialty Company

DSM origins go back to

02 when the Dutch government founded Dutch State Mines (DSM)
as a state-owned coal-mining company. In the

0 years of its existence DSM reinvented
itself several times from what was originally a coal mining company, first, as a
petrochemicals business, then a commodity chemicals business, and more recently a
specialties company.

DSM became a public company in 1989. In 1993, Simon de Bree was appointed CEO and
under his leadership DSM continued working on a portfolio shift towards advanced chemical
and biotechnical products for the life sciences industry and performance materials. These
activities were characterized by good earnings, quality, and strong growth. When de Bree
stepped down in July 1999 he was hailed for having reduced the company’s exposure to
cyclicality and improved its structure by shifting towards a larger share of value-added
products. He left the company in good shape both financially and portfolio-wise. Peter
Elverding, the board member in charge of integrating Gist Brocades at that time, succeeded de
Bree as CEO. Under his guidance, DSM was able to complete its strategic transformation into
a specialty chemical company.

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By 2003, the company had more than 20,000 employees spread across 200 offices and
production sites in 40 countries. It was the leading producer of life science products,
performance materials and industrial chemicals, and had a turnover of €6 billion in 2002 (see
Exhibit 1 for key figures). Its headquarters were located in Heerlen, in the south of the
Netherlands, close to the site of the former coal-mines. In 2002, on the 10

th
anniversary of its

foundation, DSM was given royal status and re-named Royal DSM.

Vision 2005: “Focus and Value Strategy”

One year after his appointment, Elverding announced the outcome of the Corporate Strategy
Dialogue conducted in 2000 and labeled ‘Vision 2005: Focus and Value’. With the
implementation of Vision 2005, DSM would complete its strategic transformation into a
specialty chemicals company. Elverding announced that DSM was planning to spin off its
petrochemical business. This decision was not without emotion as the petrochemicals
business was regarded by many as the ‘roots’ of the chemical company.

In addition, Elverding announced ambitious targets of increasing annual sales by
approximately 60% to €10 billion by 2005, despite the planned withdrawal from the
petrochemicals business, which provided one-third of the company’s turnover in 2000. At
least 80% of sales would have to be generated by specialty products; the rest would come
from industrial chemicals, such as melamine and caprolactam, where DSM was already the
global leader. Acquisitions would account for half of the sales increase and the remainder
would be achieved through organic growth, roughly 6% per year.

Besides focusing on a global leadership position in the specialties business, Vision 2005 also
addressed DSM’s desire to increase its market capitalization as management felt that the
company’s stock was undervalued. There were several reasons for this underperformance,
including concerns about DSM’s portfolio breadth relative to the size of the company, but
management believed that the main reason was the market’s perception that DSM still was a
cyclical stock with predominantly a commodity profile. Management hoped that the
implementation of Vision 2005 would turn DSM into a real specialties company, leading to a
re-rating and appreciation of its market capitalization. A major part of the Vision 2005
strategy was accomplished when DSM successfully sold its petrochemicals business to Saudi
Arabian Basic Industry Corp (SABIC) in June 2002. With a total net consideration of €2.

billion, this transaction was the largest single deal in DSM’s history. In a separate transaction,

DSM sold its entitlement to an annual portion of the net profits of EBN1 to the Dutch
government in December 2001. These transactions created a solid cash cushion of over €3
billion to fund the expansion of the specialty portfolio targeted in Vision 2005. To protect its
cash trove from unwanted parties, and to keep the funds and transformation process
transparent, DSM took the unusual step of placing the revenues from the disposals of EBN
and the petrochemicals business into a new subsidiary, DSM Vision 2005 BV. The use of
these resources required approval by the governing board of the foundation, which consisted
of three members of DSM’s managing board and three members of the supervisory board.
After the divestment of petrochemicals, DSM had become a substantially smaller company,

1 EBN: Energie Beheer Nederland, the entity controlling the state participations in the exploration,

production and marketing of natural gas in the Netherlands, the management of which was entrusted by the
State to DSM.

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but with a portfolio that matched the desired profile. Specialties now represented well over
two-thirds of total sales, justifying a reclassification from ‘bulk commodity player’ to
‘specialty player’.

In February 2003, Elverding was able to announce the next step in implementing Vision 2005
as DSM signed a contract to acquire Hoffman-La Roche’s vitamins, carotenoids and fine

chemicals business for €1.75 billion, the largest acquisition it had ever made.2 The acquisition
would help restore its total sales, which had been reduced to less than €6 billion as a result of
the divestment of petrochemicals, to over €8 billion. More importantly, it would boost the
specialty part of DSM’s portfolio and help achieve the goal of 80% of sales in specialties two
years ahead of the scheduled date (2005). Various analysts were skeptical about the
acquisition, however, because of the price pressure and the low growth prospects of the
business.

The DSM Organization

DSM had a decentralized organizational structure built around

business groups (consisting
of various business units) that were empowered to execute all business functions. The
business groups were grouped into three strategic clusters, mainly for reporting purposes. (see
Exhibit 2). DSM believed that this structure ensured a flexible, efficient and fast response to
market changes. The business group directors reported directly to the managing board of
directors. Staff departments at corporate level supported the managing board and the business
groups. The business groups contracted the services of a number of shared service
departments, DSM Research, and intergroup product supplies at market prices.

The managing board of directors was a collegial board with five members. It was responsible
for making decisions about the company’s strategy, its portfolio policy, and the deployment of
resources. Most board members were ‘board delegates’ for various business groups. The top
management team consisted of the 15 business group directors and the corporate vice-
presidents reporting to the board. The third layer of management consisted of

0 senior
executives. The top 300 were considered ‘corporate property’; they were on one central
payroll and Corporate had the authority to relocate these executives within DSM if they felt
the need to do so.

DSM’s corporate culture was traditionally informal and consensus-oriented, as is the case in
many Dutch companies. Long-standing careers at DSM were encouraged. However, because
DSM had been a cyclical company where 90% of the business results were the outcome of
external circumstances that could not be influenced, DSM historically did not have a strong
accountability culture.

The Strategic Planning Process at DSM

Until the early 1990s, DSM had operated a traditional strategic planning process with
planning and budget cycles taking place throughout the year However, DSM management
was no longer satisfied with this process. They felt that Corporate Planning owned the

2 The deal was closed in September 2003, after the final approval of the anti-trust authorities was obtained.

Roche’s Vitamins & Fine Chemicals business was renamed DSM Nutritional Products (DNP).

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strategic planning process and that it served too many different purposes (corporate,
divisional, business and functional strategy, internal and external). The process had become
routine over time and had degenerated into a ‘numbers exercise’. The link between strategy
and performance was not clear, but more importantly, top management felt that the quality of
strategy development was poor. Most of the strategies focused mainly on cost reduction. The
primary beneficiary of such strategies was not the company but its customers, since most of
the cost savings were typically passed on to them through price reductions. To enhance the
quality of the strategy development process, a new approach called the Business Strategy
Dialogue (BSD) was introduced in 1992. These BSDs led to Corporate Strategy Dialogues
(CSDs) which were intended to improve the corporate strategy development process.

Corporate Strategy Dialogue

DSM’s strategy development process started with an extensive study of the current situation
and the outlook for the company for the next few years. The Corporate Strategy Dialogue was
held every three years with a team of 40-50 company-wide executives. It was aimed at
developing a long-term corporate strategy, with evaluations and choices being made about
portfolio composition, investment priorities and geographical spread. The whole process took
six to nine months and was wide-ranging, involving intensive discussions in DSM

Corporate

top meetings, with the supervisory board and the Central Works Council. The end product
was a shortlist of corporate top priorities.

The first CSD was performed in 1994, followed by another in 1997 and a third in 2000.
Besides new themes that were defined in each CSD, a number of common themes had
consistently been part of the CSD, such as profitable growth, leadership position, coherent
portfolio, reduction of cyclicality, growth markets, reduction of dollar-sensitivity,
geographical spread, and being an attractive employer.

Once the priorities were set, the corporate strategic plan was to be implemented over the next
two to three years. Focusing all energy on realizing its corporate priorities had allowed DSM
to achieve most of them before their target dates.

Business Strategy Dialogue

The businesses were responsible for developing and implementing their (approved) Business
Strategy Dialogues (BSDs). The purpose of a BSD was to provide a consistent method and
terminology to help structure the strategy development process and improve its quality. BSDs
were mostly initiated by the business groups themselves, but were sometimes requested by
corporate. They occurred at regular intervals of three years on average.

The BSD process consisted of five phases with several steps within each phase. The five
phases were: Characterizing the Business Situation; Analyzing the Business System at Macro
Level; Analyzing the Business System at Micro Level; Options and Strategic Choice and
Action Planning and Performance Measurement (see Exhibit 3). But before a BSD could be
started, some preparatory work had to be done.

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Starting up

One of the first things to be done was to identify a facilitator and a challenger. To facilitate
the implementation of the BSDs, Corporate had trained around 30 “facilitators” to support the
business teams in its creative thinking process. They were selected from the top 350
executives and asked by the Chairman of DSM to become a facilitator. The task of a
facilitator was to prepare the strategy development process with the business group director
by defining the scope of the exercise, discussing the composition of the core team, examining
the time schedule, drafting a list of important strategic issues, and appointing a project
manager who was responsible for the operational part of the strategy development process.
The most important role of the facilitator, however, was to make sure that the BSD led to real
strategic options and a real choice, as expressed by Marthijn Jansen, facilitator:

“The role of the facilitator is to make sure that the BSD focuses on the right

issues, that in the “options phase” the conversation diverges, and that in the

defining of the KPIs phase, everything converges to a clear path and a clear view

of the implications of the choices made.”

In addition to a facilitator, a ‘challenger’ was selected. The challenger had an important role
as he/she had to question the BSD team about the assumptions, analyses and conclusions it
made. Challengers were chosen from the top 100 managers within DSM. In addition to the
internal challenger, a business group could also ask ‘outsiders’ to challenge them on specific
issues. These outsiders – often (technology) specialists – also shared their knowledge.

The core team in the BSD typically consisted of the complete business management team
supported by specialists from further down the organization. They were advised not to have
more than 10 to

people as management felt that larger groups did not allow for effective
discussion and hampered the creativity of the process. In large or complicated businesses sub-
groups were formed to address specific questions. The BSD process consisted of workshops
and discussion sessions led by the facilitator. Input and participation by all concerned was
considered very important.

Characterizing the Business Situation

The objective of this phase was to collect and structure the necessary information to be used
as input to the BSD. The Group provided the businesses with a strategic data checklist of the
information that might be useful for the BSD such as environmental and market analysis,
competitor assessments and analysis of manufacturing, R&D, HRM, finance and processes.
Data were supplied by functional discipline. In addition to data gathering, the checklist
offered a useful format for summarizing and presenting the information. The data set was
structured in accordance with questions such as:

• What business are you competing in?

• Which other businesses and products are you competing with?

• How attractive is the industry in terms of growth and profitability?

• What is your competitive position (benchmarks)?

• What are the dynamics? What trends can be expected in your business system?

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Practice showed that this phase could take two to four months. Corporate management
emphasized that the businesses should not view this information-gathering phase as a
checklist exercise but rather approach it from an ‘issue-driven’ angle.

Analyzing the Business System at Macro Level

In this phase, which took approximately two days, the industry in which the business unit
competed was analyzed from the outside in, based on Porter’s Five Forces model. The
discussion focused on the examination of the value added in the business chain, the
customers, the competitors, the business dynamics and the drivers of the industry. An
important step was the analysis of the different generic strategies followed by key
competitors. Understanding generic strategies forced the businesses to categorize the different
ways in which a business could compete in the industry. A strategic group was defined as a
cluster of companies following the same generic strategy. The outcome of this phase included
a basic understanding of the ‘rules of the game’, i.e. the strategic groups in which the business
might compete and a preliminary view of the key success factors (KSFs) that must be met in
order to compete successfully within a certain strategic group.

Analyzing the Business System at Micro Level

In this phase the organization was analyzed from the inside out, by looking at the internal
process. Important tools for the analysis of the internal value chain were market segmentation,
activity-based costing, internal or (preferably) external benchmarking of functions, and
assessment of the technological position. The conclusions of the micro-discussion included an
analysis of the business unit’s capabilities – both strengths and weaknesses – to compete in its
strategic group. This phase took on average two days.

Options and Strategic

Choice

After having assessed the competitive environment and the business unit’s capabilities to
compete successfully in its environment, the outcome of both steps were compared, i.e.
internal capabilities were compared with the list of KSFs (see Exhibit 4 for an example of
DSM Melamine). This allowed the business to make a choice as to the strategic group in
which it wanted to compete. Furthermore, it allowed the business to verify whether it really
could serve the selected market segments and determine what steps were necessary to achieve
or sustain leadership within the strategic group.

Action Planning and Performance

Measurement

Once the strategic choice had been made, the strategy had to be translated into an action plan
and linked to performance measurement. Based on the strategic mission and objectives of the
business unit a limited number of performance indicators that were important to the
corresponding KSFs were selected. Performance indicators monitored the implementation of
the strategy and were the measurable part of the KSFs, allowing comparisons with
competitors and performance monitoring over time. Examples of performance indicators
included market share, pipeline of products, quality, customer satisfaction, and cost per unit.
The objective of performance measurement was to provide periodic information on the
progress made toward the defined targets for each performance indicator. Furthermore, it
helped management set objectives and target levels for the next period.

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Annual Strategic Review (ASR)

The Annual Strategic Review (ASR) was performed by each business group, and comprised a
progress report on the implementation of the BSD, an update or reassessment of major
business risks, an updated sensitivity analysis and updated financial projections. The ASRs of
the business groups constituted the building blocks of the corporate ASR whose purpose was
to monitor the execution of the Corporate Strategy Dialogue. An important element in the
review was the confirmation that the chosen strategy in the BSD was still valid and that the
implementation was on track. Therefore, the validity of the main assumptions on which the
strategy was based had to be checked and the consequences of changes in the business
environment for the strategy evaluated.

Benefits and Challenges of the BSD

System

Benefits

In 2000, six years after its implementation, the BSD had become an accepted system for
developing business strategy. DSM management was pleased with the improved quality of
strategy formulation and the team-building aspects. One business group director coming from
outside DSM commented:

“The strategic planning process is very good at DSM. It is a robust and effective

process. And it is a living system, contrary to many other companies where people

just ‘feed’ the system.”

Many people valued the ‘challenger’ part of the BSD, where someone from outside the
business group challenged the assumptions and outcomes of the BSD. One business group
director recalled:

“Corporate said to us: ‘The BSD is nice but not rigorous enough. Come back

when you have really looked at the intrinsic value of each market segment. Not at

macro level, but at market segment level.’ This was very good because it forced us

to get a real grounding in segments.”

People agreed that the BSD process greatly enhanced the insights and understanding of the
business. In addition, it forced alignment, both across functions in the business unit and with
respect to the strategy. Furthermore, people felt that the BSD gave legitimacy to initiate
changes later on when the business got to the implementation phase. Another big advantage of
the process was that strategy development became a three-yearly process with just an annual
update. One top executive of corporate planning commented:

“Performing a BSD is a lot of work. But once you are done, you are done for two

to three years.”

Challenges

The final phase of the BSD – translating strategy into performance measurement – remained a
challenge. Hein Schreuder, Corporate Vice President Strategy & Development, expressed his
concern:

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“DSM invests heavily in a good strategic diagnosis, but the ultimate focus should

be on delivery.”

Although DSM had improved the quality of strategic thinking in the planning process, the
question remained indeed how to link it with execution.

Value Based Business Steering

In 2000, Henk van Dalen, Director of the DSM Polyethylenes business group, was appointed
to the managing board. He believed that the necessary step to implement Vision 2005 and its
promise for performance was a more intense focus on value-creation in the businesses.
According to the newly introduced Value-Based-Business Steering (VBBS) concept, the
overall target for DSM was to create value for all of its stakeholders, i.e. shareholders,
employees, customers, and society.

DSM approached VBBS from three different angles. The first was accountability as the basis
for financial control. The second was alignment of DSM’s strategic business planning
processes to materialize its promise for performance. The third was the introduction of new
financial operating metrics that translated Vision 2005 and BSDs into economic value terms.
DSM decided to start with the third angle because it had the biggest impact on the
organization and was a first step in aligning strategy with performance measurement. As a
result, VBBS was strongly driven by the finance department – at least initially.

New Financial Business Steering Metrics

A new set of performance metrics was developed for internally measuring and managing
financial performance in terms of value-creation (see Appendix 1). Cash Flow Return on
Investment (CFROI) became DSM’s new yardstick for measuring the performance of its
businesses. Contrary to other value-based management companies, DSM decided to use
CFROI only for internal reporting and financial performance measurement, while ROI
remained the performance measure for external reporting. A reason for this decision was that
DSM felt that the complex CFROI calculations were difficult to explain to investors.
Furthermore, DSM first wanted to see if the new metrics would work.

Total Shareholder Return was an important external performance indicator related to value-
creation for DSM as a whole, but could not be directly linked to the performance of individual
business groups. DSM chose to introduce Cash Value Added (CVA) to translate value-
creation from a capital market point of view into an objective internal DSM measure. CVA
represented the cash surplus generated (“value realized”) by a business once all capital
providers had been compensated. To determine the “value created” by a business, DSM
measured the increase in value (delta CVA) from year to year. Because DSM was a
decentralized company, the group did not impose delta CVA targets; instead, target setting
was done in a bottom-up fashion. To achieve a positive delta CVA and thus create value, a
business could work on two key value drivers: by improving CFROI or by investing in
profitable projects.

Investments were evaluated against the Internal Rate of Return (IRR) hurdle, i.e. the before-
tax weighted average cost of capital (WACC). If an investment met the WACC hurdle, it

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created value. However, DSM imposed an additional performance standard by plotting the
current business position and the historical performance of a business group on a so-called
“C-curve” (see Exhibit 5).

The C-curve provided a clear indication of the preferred route to value-creation for a business
depending on its current return. Three basic scenarios could be distinguished. For businesses
that generated returns below the WACC, restructuring and improving the return was priority
number one. Businesses that had returns around the WACC needed to improve their
performance and were encouraged to explore methods to increase CFROI. Finally, businesses
that had returns well above the WACC found themselves in a position that was profitable; the
way to create value for this kind of businesses was to grow while improving or maintaining
CFROI.

Operationalizing VBBS

Value-creation for DSM as a whole was translated into the internal value-creation measure
delta CVA. This measure could be applied at the business group level, but also at lower levels
such as business units or product/market combinations. The next step in the VBBS process
was to translate the abstract concept of value-creation into operational actions using the
concept of value drivers. DSM defined a value driver as an “operational variable which can be
influenced by acts of management and which has a direct link with value-creation.” Examples
of value drivers included: working capital as a percentage of sales, raw material costs per ton,
production costs per ton, and sales price per ton.

At this stage, the difference between value drivers and performance indicators became clear.
Performance indicators were developed during the BSD and monitored the implementation of
the strategy. Value drivers were developed during the VBBS analyses and monitored how the
implemented strategy resulted in economic value-creation. Performance indicators applied to
the strategic and tactical level and provided early warning signs (‘leading indicators’). In
contrast, value drivers applied to the operational level of the organization and were financial
and often results-based and therefore ‘lagging indicators’.

Value drivers and performance indicators did not necessarily have a one-to-one relationship.
One performance indicator (e.g. market share) could influence multiple value drivers (e.g.,
volume, margin, cost), and vice versa, one value driver could be affected by several
performance indicators. For the commodity businesses, value drivers and performance
indicators often covered the same variables. For example, a value driver could be cost per ton,
while the corresponding performance indicator would be a relative measure – costs compared
to competitors. However, the link was much less clear for the specialty activities where
factors such as the management of the innovation pipeline would be decisive for success.
There could be a significant time lag between the filling of the pipeline with new products and
the value-creation caused by higher sales volume resulting from these new products.

Once the metrics were defined and the concept of VBBS was clear, DSM started with the
strategic assessment of its various businesses. These assessments yielded valuable new
insights into the positioning of specific businesses. For example, some businesses that
accounting wise (i.e., based on ROI) looked like diamonds in the portfolio, turned out to be
value-destroying businesses from a CFROI perspective. Loek Radix, Director of Corporate
Finance, explained:

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“I was almost physically attacked when I delivered that message. But the strategic

assessments were a huge eye-opener about how we should manage a certain type

of business. Before, there was an atmosphere of complacency in successful

businesses. There was no mindset at all about delta value. However, it is not

important what today’s value is; it is important what the evolution in value is.”

Although people got excited about the results from the VBBS assessments, implementing the
new metrics and coming up with value drivers turned out to be a technically difficult and time
consuming process. Although the consultants were able to explain the concept of CFROI and
CVA, translating this into specific measures was extremely complex. According to Radix:

“The sweaty part starts when you really have to develop the metrics in detail.

Questions like: ‘What do I do with foreign investment?’ or ‘What is the

percentage of economic depreciation?’ were difficult to answer. We had to re-

define items during the process. That was not really helping us in the introduction

of VBBS and we got pushback from the operating managers.”

In early 2002, the general knowledge of the VBBS system in the DSM organization was still
limited. Although top management understood the big picture, a survey testing more detailed
knowledge showed that even at the executive level a lot still had to be learned. One corporate
manager estimated that it would take three to five years for people to really understand and
work with the new system. However, at corporate level, VBBS thinking had already
significantly changed the strategic approach vis-à-vis the businesses. Whereas previously
corporate finance used to strive for consensus, the department was now more able to
challenge the businesses, helped by the C-curve. According to Radix:

“Before we had a culture of managing conflict in our department. Now we are

able to say, ‘No, we don’t agree, we oppose this investment.’ We now challenge

businesses whose CFROI is above the WACC to grow, and we refuse to give

additional investment money to businesses whose CFROI is below WACC. We

now say ‘If you don’t have 8% CFROI, then your first task is to get that CFROI

before you get money for investments.’ As a business unit manager you can no

longer say: ‘I will grow out of the misery.’ VBBS and the C-curve really helped to

challenge in a different way.”

More than New Metrics: Creating Strategic Alignment through
Strategic Value Contracts

Although VBBS within DSM was still very much metrics oriented, right from the early days
DSM was aware that it was much more than just adopting new metrics: DSM management
felt that it gave them the tools and insights to align the business strategies to performance
measurement. The connection between strategy and performance measurement was made by
elaborating the BSD into Strategic Value Contracts (SVCs).

From 2001 on, each new BSD had to result in a SVC. A SVC was a summary of the main
conclusions of a BSD translated into measurable targets for the next three years. It contained
two main sections which had to be explicitly approved by the managing board: 1) bottom line
results focusing on CFROI and CVA and the breakdown thereof in controllable value drivers,
and 2) strategic goals laid down in the strategic mission and the implementation specified in

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terms of key success factors, performance indicators and strategic milestones. Thus, both
performance indicators for monitoring strategy implementation, and value-based measures for
monitoring value-creation were incorporated into the contract. Future performance of the
business would be monitored against the agreed-upon SVC.

DSM felt that the SVC was a strong communication tool and helped the implementation of
strategy and VBBS at the business group levels. It explained the steps of how businesses were
planning to execute their strategy. This led to more transparency and helped the management
board ask the right questions and challenge the business groups. One management board
member explained:

“What always had frustrated me about the BSD was that a strategy was

developed, but monitoring the implementation of this strategy was difficult. I am

very pleased with the Strategic Value Contract because people are now forced to

implement the strategy. Now, people really have to finish the BSD. That is much

clearer.”

The SVC was signed by the business group director and the business group referee in the
managing board, who signed on behalf of the entire managing board. A successor taking over
responsibility for someone’s business also had to take over the existing SVC. Proposals for
substantial modifications to the contract could only result from major changes in the business
environment and had to be approved by the managing board. In early 2002, two business
groups had their SVC and five other contracts were in progress. By 2003, nearly all business
groups had their SVC.

Compensation

In the past, not meeting targets was widely tolerated at DSM, largely as a result of the fact
that DSM had been a cyclical company where 90% of the businesses results were beyond the
firm’s control. DSM management felt that it had to change this ‘culture of excuse’ and high
level of ‘cyclicality tolerance’ as DSM transformed into a specialties company. The
implementation of SVCs supported this change in culture.

DSM felt that the next step in the implementation of VBBS was to link it with the managers’
performance evaluation system. In 2002, it rolled out a new performance appraisal system for
its executives which evaluated managers based on their ability to develop sustainable
strategies and get them approved (BSD), the achievement of targets set in the SVC, and a
number of enabling factors, such as having the right processes and workforce in place. The
management board evaluated the top 30 executives, who in turn appraised the managers
below them. This appraisal was used to determine managers’ salary evolution.

The second element of the compensation system was a short-term incentive program which
ranged from 20% to 30% on top of the base salary. This incentive scheme was linked to
VBBS by replacing ROI with delta CVA and calculating bonuses based on the current year’s
delta CVA. Thus, executive compensation was linked both to personal targets and to financial
performance measures, such as CFROI, delta CVA and CVA. Lower management was held
responsible for the relevant value drivers. Finally, DSM introduced a personnel share option
scheme alongside the existing management option scheme in 2001.

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When SVCs and the new performance appraisal system were first introduced, managers felt
uncomfortable as the pressure on them gradually mounted. On the other hand, the contracts
made it clear what was expected of them and improved communication both between the
business groups and Corporate and within the business group itself. SVCs also led to a
demand from the business group directors with respect to key individuals in their
organization. Previously, corporate HR had the authority to move people around and
managers typically changed jobs every 18 months to two years. Under the new system,
however, some business group directors claimed that they were unable to achieve their SVC
targets if they could not keep their key managers. DSM management therefore decided that
employees would not move around for a period of three years, but also stated that business
group directors had ‘corporate’ responsibilities in terms of training and follow up of people.

In 2002, DSM was unable to meet its ambitious profitability targets due to unfavorable
economic developments. However, a number of corporate improvement targets relating to
safety, health and the environment, and a number of targets linked to the Group’s strategy
were realized. The overall realization was 20%. Moreover, the Supervisory Board had used its
discretionary powers to grant an additional bonus to the members of the Managing Board
amounting to 10% of their fixed annual salary, in recognition of their extraordinary efforts in

strategically repositioning the company.3

The BSD and VBBS Process at Work at DSM Melamine

The DSM Melamine business group was part of the ‘Industrial Chemicals’ cluster. It was the
global leader in the manufacturing and marketing of melamine, supplying almost one third of
global demand. Melamine is a heat- and scratch-resistant plastic mainly used in impregnating
resins and adhesive resins for laminated flooring and panels in the wood-processing industry.
It is also used in car paints, durable plastic tableware, euro bank notes, and flame-retardants.
The gas-phase production technology that DSM Melamine used to produce melamine was a
proprietary technology developed in 1967 and was a highly sophisticated process technology.
The raw materials for the production of melamine were natural gas, ammonia, carbon dioxide,
and urea. Since ammonia and carbondioxide were by-products of melamine production,
melamine plants had to be built close to a urea plant.

In 2001, world consumption of melamine was nearly 700,000 metric tons, valued at
approximately $700 million. DSM Melamine was well established with advanced production
plants on three continents and a sophisticated technical support system in place for its
customers. In 2002, DSM Melamine’s image was one of a global reliable supplier of ‘hassle-
free’ product in Europe, Americas, and Asia Pacific. It earned more than half of its sales from
long-term contracts with large customers who considered melamine a strategic purchase item
and valued security of supply.

The melamine market was subject to high volatility. Demand for most downstream markets
for melamine was greatly influenced by general economic conditions. Consequently, demand
followed the fortunes of the leading world economies. Furthermore, demand and capacity had
not always been in balance, leading to significant price fluctuations. In 1998, for example, the

3 Source: DSM Annual Report 2002, page 43.

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melamine market was characterized by supply shortages caused by technical problems at
several melamine producers worldwide. High imports from overseas by melamine consumers
via traders raised spot prices to levels of € 3,500 /ton. In 1999, however, prices collapsed to
€800-900/ton. One of the major challenges for melamine producers was therefore to balance
supply and demand.

Forecasting demand was not sufficient, however. An accurate estimate of global melamine
supply was also needed to avoid major under- or over-supply. This was hard to predict
because of the many unplanned maintenance shutdowns at several melamine producers
worldwide. The management of DSM Melamine had worked hard to improve its estimates of
capacity utilization vis-à-vis global nameplate capacity.

The Early BSDs

DSM Melamine started in 1992 with its first BSD, followed by others in 1995 and 1999. The
BSD process proved to be very helpful in addressing the problems and challenges the
business group was facing and dramatically changed its performance (see exhibit 6 for the C-
curve for DSM Melamine for the period 1992-1997).

BSD 1992

The main outcome of the 1992 BSD was the final approval of a US$80 million project to
dismantle a relatively new melamine plant at Geleen in the Netherlands, and reconstruct it in
Indonesia. DSM Melamine had made the decision to build the plant in Geleen in 1989 when it
predicted a 5% annual growth in melamine in Europe. However, since then melamine sales
and prices in Western Europe had declined as demand in key markets in the former Soviet
Union stagnated and exports to Eastern Europe slumped. The management team of DSM
Melamine had to decide whether to close, sell, or relocate the plant that had been built only in
1992. Management decided to rebuild it in Indonesia where its Jakarta-based business Joint
Venture, DSM Kaltim Melamine, in which it had a 60% stake, would own and operate the
plant. DSM had wanted to build a Southeast Asian melamine plant for some time as the
Asia/Pacific region was a fairly new market that was developing at a fast pace, especially in
countries with major wood-processing industries. The Geleen plant was dismantled in 1994
and rebuilt in Indonesia in 1997, thereby reducing the company’s worldwide melamine
capacity for three to four years. The plant was the largest melamine plant in the Far East and
the first to be built in Southeast Asia.

BSD 1995

In 1995, the second BSD led to a major strategic breakthrough in the eyes of management.
The strategy was to ‘actively maintain’ its global leadership position in terms of market share,
technology, cost and customer image. Competition was based on ‘price over volume’ and
DSM Melamine wanted to grow at the prevailing market rate. A breakthrough in the BSD
process occurred when DSM Melamine woke up to the fact that it did not have the right
technology to grow with the market. Instead of continuing to build large plants with gas-phase
production technology – which would cover the growth of the market for the next four to five
years – management decided to acquire Shortened Liquid Phase (SLP) technology in 1997.
This technology, which required fewer production steps to produce high-quality melamine,
would enable DSM Melamine to build smaller plants while still being cost competitive with

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the traditional gas-phase plants. However, to achieve the same quality level as the melamine
obtained in DSM’s gas-phase process, the SLP technology had to be upgraded.

BSD 1999

In 1999, a third BSD was performed. The project motivated by the new review was to build a
fourth Melamine plant in Geleen based on the new liquid phase technology, which required an
investment of €90 million. A portion of that investment would be used to expand urea
production at the site. The melamine plant was expected to come on-stream by end 2003.

The strategy that followed the 1999 BSD was to continue the ‘actively maintain’

strategy. Management of DSM Melamine expected worldwide consumption of

melamine to grow by 5-6% per annum. This growth was concentrated in Europe

and to a lesser extent Asia (China) and the Americas. Accordingly, DSM

Melamine planned to expand its global capacity by 30kt every two to three years

in addition to de-bottlenecking the existing plants.

Key success factors for the actively maintain strategy were ‘lowest cost delivered’ by de-
bottlenecking existing gas-phase plants and new low cost technology, and ‘security of sales’.
The latter could be achieved by negotiating long-term contracts with global key customers,
meeting the requirements for strategic customer alliances, and differentiating service levels.

The Strategic Value Contract

In 2001, the first SVC was drafted for DSM Melamine. Since it was DSM’s first experience
with these contracts, it was primarily viewed as a learning experience. The subsequent 2003
contract, signed in September 2002, was considered the first “real” contract. It was based on
the 1999 BSD and would be revised at the end of 2003, once the 2003 BSD was finished.
(Exhibit 7 shows an extract of the SVC for the period 1999-2003).

The 2003 BSD Process

The 2003 BSD was initiated by the management of DSM Melamine (DMM), as the Annual
Strategic Review of 2002 had shown that its current strategy would not enable the business
group to achieve the ambitious targets set forth in the SVC. Projections by DMM showed that
the group would have a zero or negative delta CVA from 2004 onwards and reach a major
negative delta CVA in 2007. These calculations were based on assumptions from the
corporate planning group which had predicted a major economic slowdown for 2007.

In addition, the environment had changed considerably. After experiencing strong demand in
1998 and most of 2000, melamine markets declined or remained stagnant in most regions in
2001. High natural gas costs, lower margins, depressed demand, and significant capacity
additions during 1998-2001 forced many melamine producers to curtail production in 2001.
Producers such as Melamine Chemicals and Namhae Chemical exited the market. However,
industry experts expected the demand for melamine in the US and Western Europe to recover
and grow at nearly 3% per year from 2001 to 2006. Demand in Southeast Asia, particularly in
China, was expected to experience much higher growth rates because of increasing production
of laminates for both domestic use and exports. In the 1999 BSD, DMM had not actively
looked into China, as the main investment opportunities were seen to be in Europe (see

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Exhibit 8 for regional growth forecasts and realization). However, because of the impressive
annual growth rate (15%) of the Chinese melamine market, the management of DMM wanted
to investigate the impact of China on its current strategy.

Kick-off

The BSD 2003 of DMM started with a kick-off meeting in September 2002 with the BSD
global management team, including the management team from Sittard, the general manager
of America, the general manager of Indonesia, and the facilitator. Although the facilitator
typically came from outside the business group, DMM decided to ask its own Director of
Planning and Projects, Marthijn Jansen, to act as facilitator. In his former function at
corporate planning, Mr. Jansen had been facilitator for various business groups and was
therefore perceived as very experienced in this role. He was expected to spend half of his time
on the BSD process for a period of six months. The challenger, Jos Goessens, Business Group
Director of Plastic and Engineering, was asked to join the BSD team in January 2003.

One of the criticisms of previous BSDs was that people felt that they were used to ‘sell’ a
project to top management. The BSD team wanted to prevent this from happening again in
2003 and therefore stressed the importance of challenging each other during the whole
process and making a serious effort at identifying alternatives.

As DMM wanted to perform an ‘issue-driven’ BSD, the BSD team started with identifying
the subjects on which they thought decisions were needed. A total of 35 issues were identified
ranging from subjects such as marketing & sales, operations, R&D, personnel & organization,
and finance, to regional issues related to DMM Indonesia, America, Europe, and China. The
next step was to decide which information was needed on these issues to make decisions and
who should provide it.

Value Teams

The BSD team decided to create so-called ‘value teams’ for each issue, who were responsible
for gathering information (i.e. phase I of the BSD – characterizing the business situation) and
performing phase II (i.e., analyzing the business system at macro level). By implementing
value teams DMM wanted to involve as many people as possible in the BSD process, thereby
creating a large platform for the BSD. The value teams presented the results of phase I and II
to the BSD team in December 2002. The micro analysis was finalized in February 2003. The
next phase was options and strategic choice (phase IV).

Options and Strategic Choice

A main point of discussion in the BSD 2003 was DSM Melamine’s position in the US,
Indonesia and China. Its 50-50 joint venture with Cytec was the largest player in the US with
the highest prices. However, the business was not profitable because of high raw material
costs. DSM Melamine had the best plant in the world located in Indonesia, but profits there
were unsatisfactory due to unstable raw material supply and the negative impact on demand
of the Asian crisis. Consequently, it was unable to realize the low cost production necessary.
Furthermore, DSM Melamine did not yet have a position in China, which the marketing
managers viewed as the fastest growing market.

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Management felt that the existing ‘actively maintain’ strategy may no longer be the best,
especially since VBBS required businesses to deliver a positive delta CVA every year.
According to one of the managers at DMM:

“VBBS has its limits. It is nice for a start-up business but for a mature business it

is very difficult to produce a positive delta CVA year after year. It is not easy to

create value within a three-year contract in a business like melamine where it

takes two to four years for a plant to be operational. So VBBS can lead to short-

termism. You have the choice to either increase CFROI on the existing asset base

by cutting costs or raising prices, or you can increase the asset base. However,

the latter takes more time and involves greater risk.

“If DSM did not have VBBS, we would probably continue with our current

‘actively maintain’ strategy.”

In February, after the macro and micro session, management felt that it should present
Corporate with the basic choice to either grow the business – as Dijkman and his team felt
that they had reached the limits of cost reduction – or otherwise divest.

Growing the Business

In the ASR 2002, it was concluded that DSM Melamine could grow faster than was currently
the case but that it lacked the capacity to do so. Management wondered if it should be more
aggressive and investigated growth opportunities in, for example, Trinidad, a Caribbean
island with natural gas production, the Middle East, Europe, and China (see Exhibit 10 for the
choice on growth ambitions, ranging from ‘give up market share’ to ‘aggressive growth’). In
Europe, DMM’s main competitors, such as Agrolinz, were following ‘grow/build’ scenarios
in response to growing worldwide demand. Leon Halders, Vice-President Marketing & Sales
DSM Melamine, noted:

“Our two main competitors in Europe are growing heavily, one is tripling and the

other is doubling. They are not part of a large company like DSM, but part of a

company where melamine is the most attractive business. Melamine is profitable,

but because we are part of DSM with a certain strategic mission, we are not the

spearhead of DSM strategy.”

Although DMM had looked into several growth options, China still seemed the most natural
and promising market because of its high growth rates. However, questions remained. First of
all there was the question of how DMM, which positioned itself as a main supplier, should
enter the Chinese market which was currently a spot market. Another issue was the fact that
DMM’s existing customers had no significant production base yet in China, which meant that
it would have to build a customer base. Finally, a wave of capacity expansion in 2004-2006
was expected to result in oversupply. According to industry analysts, approximately

0
thousand metric tons of melamine was added between 1998-2001, with China accounting for
nearly half of new capacity. If all announced capacity expansions were completed, global
capacity utilization was expected to fall to approximately 80% in 2006 from 86% in 1998.
Some anticipated melamine projects were likely to be postponed or cancelled as a result. But,
despite the above challenges, the BSD team still believed in major growth opportunities in
China.

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As DSM Melamine’s financial performance exceeded the WACC, requests for investment to
build new melamine plants were justifiable from a VBBS point of view. Dijkman, however,
wondered if corporate management would agree with this new strategy, as it was not in line
with DSM’s corporate strategy of becoming a specialties company. Furthermore, investments
in melamine plants always involved large amounts of money (between 50 and 100 million
euro), which in the first few years would significantly lower DMM’s CFROI.

The Corporate Perspective on DSM Melamine

At corporate level, DSM management faced a dilemma. From a financial perspective and in
line with VBBS principles, investments in DSM Melamine would make perfect sense. On the
other hand, following the corporate strategy of becoming a specialty company, one could
question how much more to invest in the remaining commodities business such as melamine.
It was also important to think through how investors and analysts would react if DSM were to
invest further in its melamine business. Earlier in 2003, the management board had already
committed to a €50 million proposal of Caprolactam, its other remaining commodity business.

Another issue confronting the management board was the permanent challenge of balancing
short-term requirements and long-term value. Big investments would significantly lower
DMM’s CFROI and only increase CVA in the long-term.

While debating the dilemma on the growth opportunities for DSM Melamine, however,
Corporate was also challenging the business on the cost side. It agreed that DSM Melamine
had a good low cost position, but as one corporate executive explained:

“We push DSM Melamine. The business has excellent low costs but we are not

interested in costs per ton. We would like DSM Melamine to benchmark itself

against competitors in its BSD 2003 so that they can see their relative cost

position.”

The Broader Issues

In addition to the strategic issues facing DSM Melamine, Corporate also had to tackle the
remaining challenges of the BSD and VBBS processes. First, VBBS implementation was
heavily centralized in the sense that the corporate center, as opposed to the business groups,
was driving the change. Although the corporate center had trained facilitators and provided
tools to support the implementation, the process was complex and somewhat slow, with
significant differences in progress on implementation between the various business groups.
The question was how DSM could speed up the process. Top management hoped that the new
appraisal system would help the implementation move forward.

Another concern related to how BSDs and SVCs could be effectively translated into specific
actions and program management. Thus far, it had been entirely up to the business groups
whether and how to operationalize the chosen strategy in terms of value drivers, or how to
integrate the SVC with the performance measurement system such as the balanced scorecard.
Business groups chose their own way to resolve these issues, with the outcome often being
dependent on the consultant that had been hired.

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The real test for the future was ‘consequence management’. What should DSM do if a
business group did not meet its contract, given DSM’s historical culture of tolerance for
mediocre performance?

Finally, there were some more fundamental questions. Implementing the new financial
metrics had led to greater emphasis on short-term performance. DSM felt that this short-term
focus could be hazardous for a specialty company that heavily depended on innovation and
R&D. For example, in 2000 one of DSM’s most successful and profitable products was
Stanyl, a product which had been 10 years in development, with negative EPs throughout all
those years. How would these kinds of investment projects be handled under the new
approach?

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Exhibit 1

Key Figures on DSM

Balance Sheet

( €million)

2002 2001

Fixed assets
Current assets
Total assets
Capital employed

3,639
5, 357
8,996
4,570

4,442
4,133

8,575

5,763

Group equity
Provisions
Net debt
Total group equity and liabilities

5,186
682

-1,038
8,996

8
809
8

8,575

Income Statement
(€million)

2002 2001

Ongoing

Activities

Net sales Life Science Products
Net sales Performance Materials
Net sales Polymers & Industrial Chemicals
Net sales Other Activities
Total, ongoing activities
Operating profit plus depreciation and amortization (EBITDA)
Operating profit (EBIT)
Capital expenditure (including acquisitions)

Discontinued activities

Net sales
Operating profit plus depreciation and amortization (EBITDA)
Operating profit (EBIT)

Total

Net sales
Operating profit plus depreciation and amortization (EBITDA)
Operating profit (EBIT)
Capital expenditure (including acquisitions)

Profit on ordinary activities after taxation
Net profit
Dividend
Depreciation and amortization
Cash flow

Workforce at 31 December

2,168
1,767
1,

433
5,636

767
383
496

1,029
1

6,665
892
450
536

349
1,188

199
442

1,630

18,375

7
1,855
1,302

357
5,751

741
336
561

2,219
301
185

7,790
1,042

652

369
1,415

199
521

1,936

21,504

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Copyright © 2004 INSEAD, Fontainebleau, France.

Exhibit 2

Organizational Structure, as of March 2003

P. Elverding

Chairman

J. Dopper

J. Zuidam

Deputy

Chairman

H. van

Dalen
F. Sijbesma

DSM N.V. Managing Board of DirectorsCorporate
Operational

Audit

Energie

Beheer

Nederland

Corporate

Secretariat Finance &

Economics

Planning &

Development

Human

Resources

Research

Legal

Affairs

Corporate Staff Departments

Communi-

cations

Safety,

Health

Environment &

Manufacturing

ICT

DSM Fine

Chemicals

DSM Anti-

Infectives

DSM Pharma-

Ceutical

Products

DSM Food

Specialties

DSM Bakery

Ingredients

DSM

Elastometers

DSM Coating

Resins

DSM

Engineering

Plastics

DSM

Composite

Resins
DSM

Fibre

Intermediates

DSM

Agro

DSM

Melamine

DSM

Energy

Life Science

Products

Performance

Materials

Industrial

Chemicals
Other

Activities
DSM

Venturing &

Business

Development
DSM
Industrial

Services

Stamicarbon

Participations

P. Elverding

Chairman
J. Dopper

J. Zuidam
Deputy
Chairman
H. van
Dalen
F. Sijbesma
DSM N.V. Managing Board of DirectorsCorporate
Operational
Audit
Energie
Beheer
Nederland
Corporate
Secretariat Finance &
Economics
Planning &
Development
Human
Resources
Research
Legal
Affairs
Corporate Staff Departments
Communi-
cations
Safety,
Health
Environment &
Manufacturing
ICT
DSM Fine
Chemicals
DSM Anti-
Infectives
DSM Pharma-
Ceutical
Products
DSM Food
Specialties
DSM Bakery
Ingredients
DSM
Elastometers
DSM Coating
Resins
DSM
Engineering
Plastics
DSM
Composite
Resins
DSM
Fibre
Intermediates
DSM
Agro
DSM
Melamine
DSM
Energy
Life Science
Products
Performance
Materials
Industrial
Chemicals
Other
Activities
DSM
Venturing &
Business
Development
DSM
Industrial
Services
Stamicarbon
Participations
21

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Copyright © 2004 INSEAD, Fontainebleau, France.

Exhibit 3

The Strategy Development Process

Phase I

Business

Situation

Macro

Business
System

III

MicroBusiness

System

Options/

Strategic

Choice

Actions &

Performance
Measurement

Tools Strategic data
checklist

Facilitators Facilitators Facilitators Management
reporting

format

Duration 2-4 months 2 days 2 days 1-2 days Continuous

Objective Gather basic
information for
BSD

Analyze
business
dynamics,
drivers and
strategic
groups

Understand own
capabilities, analyze
strength/weaknesses

Understand
options,
select
performance
indicators
and targets

Continuously
measure
progress

Tasks *Environmental
and market
analysis
* Competitor
assessment
*Analysis of
manufacturing,
R&D,
technology,
HRM, finance,
processes

* Discuss
business
chain
* Analyze
dynamics
* Determine
industry
drivers
*
Characterize
strategic
groups

* Formulation
and evaluation
of options
* Detailed KSF
analysis
* Qualifiers
* Differentiators
* Formulation of
indicators
* Targets from
competitive
benchmarking

* Progress
control
* Action plan
* Target
setting
* Continuous
improvement
program

Output * Document
with required
information
* Strategy
support
database

* Strategic
groups
* Industry
drivers

* Capabilities
* Organizational /
HR assessment

* Strategic
plan
outline
* Strategic
mission
* KSFs
* Indicators
* Targets

* Strategic
contract
versus
targets

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Exhibit 4

DSM Melamine: Strategic Groups, BSD 1999

DSM

Competitor 1

Competitor 2

Competitor 3

Competitor 4

Competitor 5

Competitor 6

Competitor 7

merchant players

KSF’s:

– low cost

– security of sales

Regional < > Global Sales

lo
w

< >

h
ig

s
e
rv

ic
e
i

n
te

n
s

it
y

Captive players

KSF:

– cost competitiveness in

production

‘Local for local’ players:

KSF:

– customer loyalty

Three strategic groups

DSM
DSM
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Competitor 5
Competitor 6
Competitor 7
merchant players
KSF’s:
– low cost
– security of sales
Regional < > Global Sales
lo
w
< >
h
ig
h

s
e
rv
ic
e
i
n
te
n
s
it
y
Captive players
KSF:
– cost competitiveness in
production
‘Local for local’ players:
KSF:
– customer loyalty
Three strategic groups
DSM
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Competitor 5
Competitor 6
Competitor 7
merchant players
KSF’s:
– low cost
– security of sales
Regional < > Global Sales
lo
w
< >
h
ig
h

s
e
rv
ic
e
i
n
te
n
s
it
y
Captive players
KSF:
– cost competitiveness in
production
‘Local for local’ players:
KSF:
– customer loyalty
Three strategic groups
DSM

KSFs Capabilities

Strategic Choice

Exhibit 5

C-curve

0
5

wacc

Top 20% S&P 500 index stock market performers

whose return was initially lower than the WACC

CFROI %

10
15
20

0.6 0.8 1 1.2

Gross Assets (index)

(N =

)

1992

1991

1993

1994

1995

1996

Grow

Improve

Shrink

1
2
3

Three dos lead to the C-

curve

0
5
wacc
Top 20% S&P 500 index stock market performers
whose return was initially lower than the WACC
CFROI %
10
15
20
0.6 0.8 1 1.2
Gross Assets (index)
(N = 27)
1992
1991
1993
1994
1995
1996
Grow
Improve
Shrink
1
2
3
Three dos lead to the C-
curve

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Exhibit 6

C-curve for DSM Melamine 1992-1997

Gross Assets (Index: 1992 = 100)

Exhibit 7

Extract of the Strategic Value Contract for DSM Melamine 1999-2003

Strategic mission.

Actively maintain global leadership in market share, technology, cost, and customer image.

1. Financial Performance Measures:
* EBITDA (m€)
* CFROI (%)
* CVA (m€)
* Delta CVA (m€)

2. Key Success Factors and Performance Indicators
Security of sales
* Long-term contract with global key-customers
* Meet the requirements for strategic customer alliances
* Differentiate service levels
* Volume sold under contract
* Share of Integrated Panel Producers
* Share global customers

Lower cost
* De-bottlenecking existing gas-phase plants
* New low cost technology
* Capability to Produce (CTP)
* Controllable fixed out of pocket cost/m ton

3. Value Drivers:
* Unit production cost DSM Kaltim Melamine
* Unit production cost DSM Melamine Americas
* Unit production cost DSM Melamine Europe
* Production volume
* Average sales price
* Sales volume existing plants

4. Strategic Actions and Milestones
* Defined per project

5. Required Resources
* Pre-approval for the next 3 years

6. Sensitivity Items
* Global utilization rate
* USD/EUR currency rate

Exhibit 8

BSD 1999 Regional Growth Rates: Forecasts versus Realization

1999 Forecast 1998-2002 Realization

Europe 4,0% 4,5%

Americas 5,4% 0,0%

Asia Pacific (APAC) 5,9% 2,9%

China 7,7% 33%

Exhibit 9

DSM Melamine Choice on Growth Ambitions

Market Share Target

20% 25% 30%

Give up market share Organic growth Active growth Aggressive growth

• Price over volume

• “Europe only”

• Lose market
leadership

• Max short term
cash

• Irreversible:

– give up China
– lose scale economies
– technology standstill
– competitors build

• Organic growth
with existing
customer base

• China as
opportunity
market only

• No new
production
capacity

• Accept gradual
loss of market
share

• Gain market share

• Access to new
Integrated Panel
Producers
customers

• Significant market
share in China

• Build lowest cost
plant, leave high
cost plant

• Signal
commitment to
leadership

• “volume over
price” policy for
plant load

• Secure lowest cost
position
worldwide

• Acquisition may
bring growth
without price
erosion

INSEAD
5165

Appendix 1

Definition of Metrics

CFROI: The Cash Flow Return on Investment is a return measure that is the ratio of
the Sustainable Cash Flow divided by the Gross Assets.

CVA: Cash Value Added is the Sustainable Cash Flow remaining after a reservation
has been made for the capital charge. Formula: (CFROI-WACC) * Gross
Assets

EBITDA: Earnings Before Interest & Tax, Depreciation & Amortization. EBITDA
equals the Revenue minus the Cost of Sales.

Gross Assets: The sum of all historical costs of the assets that are being used by a business
plus Working Capital and Economic Goodwill paid for any acquired
company.

IRR: Internal Rate of Return. Discounting of future cash flows to the year in which
the planned investment is made.

ROI: Return on Investment. This is a return measure expressed as the ratio of the
Operating Profit of a business and the Capital Employed.

Sustainable Cash Flow (SCF): EBITDA – Tax – Economic Depreciation + Other SCF
from non-consolidated companies.

Total Shareholder Return (TSR): Dividend + stock value increase

WACC: Weighted Average Cost of Capital is the average return on invested capital
(debt and/or equity) that capital providers demand from a business. In the
case of DSM, the WACC equals 8%.

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Bibliography

“Strategy and Performance Management at DSM.” Bloemhof, Marjolein; Haspeslagh,

Philippe; Slagmulder, Regine. Case No. 5165. Published 01/2004, INSEAD, (30 pages).

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Front Cover
Title Page
Table Of Contents

Strategy and Performance Management at DSM
Bibliography

Back Cover

Assignment 1: Strategy and Performance Management at DSM

Due Week 3 and worth 150 points

Read the case study titled “Strategy and Performance Management at DSM” located in the XanEdu case pack (Link Below)

Write a four to five (4-5) page paper in which you:

1. Using the stages from the performance management process, suggest the key processes that DSM needs to provide within its system in order to successfully link its key success factors (KSF). (Note: See Exhibit 4.) Provide a rationale for your suggestions.

2. Select three (3) drivers, and examine the central manner in which DSM management has aligned its business strategies to performance measurement.

3. Critique or defend DSM’s competitive advantage by using three (3) of the six (6) assessment points from the textbook. Justify your response.

4. Use two (2) external sources to support your responses. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

Summarize the components of performance management processes and systems.

Evaluate how the performance management system aligns with organizational goals.

Assess the effectiveness of performance management programs and policies.

Use technology and information resources to research issues in performance management.

Write clearly and concisely about performance management using proper writing mechanics.

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