Open innovation in practice: new businesses get built from a culture of change at the Dutch...

DSM has come a long way since it was founded in 1902 as the coal mining company Dutch State Mines. Now a multinational life sciences and performance materials company, DSM supplies major global producers in many industries, including pharmaceuticals, food, automotive, transport, metal, machine-building,

DSM's success has its roots in a long history of continuous innovation and change, in the course of which it has developed a wide range of competences and technologies (see "Driving Evolution," next page). DSM uses these skills to identify promising ideas and to grow them into new businesses, applying its "culture of change" to create value.

Managing Change, Building Businesses

Today, DSM is transforming itself into a multi-specialty enterprise that aims to achieve global leadership in activities with a relatively high added-value, strong growth and stable profits. To put this strategy into effect, the company focuses on products for the life sciences industry and on performance materials. Specialty products now account for almost 80 percent of overall sales. The relative importance of end markets that are cyclical and sensitive to economic growth has decreased, and venturing is beginning to play an increasingly important role in achieving growth.

DSM's transformation into a specialty chemicals provider is not a radical break with its past, but rather a natural continuation of its historical development. During more than 100 years in business, the company has developed considerable managerial expertise and skills in executing corporate actions efficiently and responsibly. Its managerial structure is firmly embedded in the organization, and this has given DSM the tools for turning promising ideas into new businesses.

In the 1990s, DSM founded a corporate New Business Development unit, which took ideas (primarily thought up by its own researchers) and attempted to develop them into new businesses with a good fit with existing DSM businesses. Over the decade, DSM spent around 40m [euro] creating several new businesses by evaluating opportunities and commercializing selected projects. The company has developed a portfolio of activities related to polymers and polymer additives and created two fully-owned start-up companies: DSM Solutech and DSM Melapur.

Identifying Opportunities, Creating Value

The success of this approach, plus the many opportunities to cooperate with external start-up companies, led to the creation of a new business group within DSM in 2001: DSM Venturing & Business Development (DV&BD) in which about 50 people are active in a process we call "open innovation." The creation of a new business group testifies to the increased importance of value creation, using both internal and external leads at all stages of new business development.

In order to boost its contacts with innovative regions around the world, by 2000 DSM had committed approximately 25m [euro] to five venture capital funds focused on life sciences, biotechnology and performance materials. DV&BD also directly participates in about 10 start-up companies, both outside and within the company (which have now been spun out). Such investments in the future may lead either to further value creation, strategic alliances or to the "spinning-in" of a successful company into DSM.

DV&BD does not restrict itself to areas already familiar to DSM, but looks for opportunities based primarily on the criterion of whether DSM can use, add and share its core competences to create value. DV&BD focuses on identifying new business opportunities in life sciences and performance materials, and synergistic areas that span both fields. Its mission is to develop these ideas into practical, profitable businesses. Prompted by DSM's current strategic shift, DV&BD is now looking into new areas in order to increase the number of start-up companies, which can then either be spun out or integrated into DSM. In short, the objective of DV&BD is to create substantial value for DSM.

Open Innovation

DV&BD's open innovation model for creating and nurturing new businesses involves the continuous appraisal and testing of ideas, projects and businesses until they are fully developed, spun off or rejected (see Figure 1).

[FIGURE 1 OMITTED]

When creating a new business, DV&BD assesses the "First Gate deliverables." New business ideas are identified, screened, developed and evaluated, and a SWOT (strengths, weaknesses, opportunities, threats) analysis is carried out. The potential business is tested according to a "5C" analysis:

1. Context: evaluation of the value chain, markets, attractiveness, drivers, dynamics, and value added.

2. Customers: screening of segments, key customers, their needs and values.

3. Competitors: analyzing the competitive position.

4. Company: the synergy between markets, customers and raw materials, and evaluation of technologies, competences and strategy, determination of key success factors.

5. Costs: system costs, cost structure, projected financial performance.

If the results of the rigorous evaluation are positive, DV&BD then progresses to the "Second Gate." Before the business idea can pass through this gate, a realistic business plan has to be drawn up, based upon customer trials, commercial approvals, and market feedback following initial sales. Before these initial sales are made, however, all patent and health and safety issues have to be clear, and all lab experiments successfully completed. The production process has to be designed and small-scale production begun. Finally, a marketing plan based on a "5P analysis"--product, promotion, personal selling, price, place--has to be implemented.

Business Development Model

The creation of new businesses is a dynamic process, best represented as a horizontal funnel, shown in Figure 2. Ideas for new products and processes arrive at the left. These ideas come from inside as well as outside the company--from other companies, universities or research institutes. Only some of these ideas will be of interest to DSM, and these are investigated in more detail.

[FIGURE 2 OMITTED]

Development projects are started for the most promising ideas. After some time, a go/no-go decision has to be made. If the decision is made to stop the project, the technology may be offered to other parties. This may also happen in reverse: other parties may offer projects that are of interest to DSM.

After a development project has been approved, a small company is established to develop the technology further. Two or three years later, DSM reevaluates and decides whether to continue or spin out the company. As other companies and venture capitalists do the same, there may also be companies offered for sale at a similar stage of development that are of interest to DSM.

In the next phase of development, when the commercial value of the technology has been proven, DSM can still decide to divest. Likewise, it can also acquire businesses or technologies that other companies wish to divest.

Finally, some projects and start-up companies reach the end of the funnel and grow into mature businesses.

This entire process of taking in and pushing out technology is accompanied and stimulated by licensing agreements. DSM can use the process to identify interesting technologies and to make deals with other parties about the use, selling or purchase of technologies.

Intrapreneurs--From Good Ideas to Viable Projects

The process of turning an idea into a development project depends upon a change in mindset, a transformation from a "scientific" to an "intrapreneurial" view (Figure 3). DV&BD embodies a "scientific" mindset in which individual reputation is paramount. Scientists are focused upon technology for its own sake and wish to receive recognition for spreading knowledge widely and helping others to reproduce their work. Scientists are very good at generating ideas. But turning these ideas into viable projects requires a completely different, "intrapreneurial" mindset. An intrapreneur will:

* Do any job needed to make a project work, regardless of his or her job description.

* Be true to his or her goals, but realistic about how to achieve them.

* Recruit a strong team.

* Forget pride of authorship and share credit where it is due.

* Ask for forgiveness rather than permission!

Figure 3.--The process of turning an idea into a development project
depends upon a change in mindset, a transformation from a "scientific"
to an "intrapreneurial" view.

Scientists

* Earn their reputations as individuals.
* Get recognized for giving away knowledge.
* Tell people how to reproduce their work.
* Think economic feasibility doesn't matter.
* Think the technology is everything.
* Overvalue their contributions.

Intrapreneurs

* Know that teamwork provides leverage.
* Get recognized for protecting knowledge (IP).
* Fear other people reproducing their work.
* Consider economic feasibility paramount.
* Recognize that technology is only a starting point.
* Let scientists believe they are valuable.

After a business project has been turned into a full-fledged, "grown-up" business, yet another management style is required--instead of an intrapreneurial approach, a professional management style is required. Examples of projects within DV&BD:

* AR coatings are organic coatings that cut the cost of making anti-reflective (AR) glass and plastic substantially.

* Micabs is a laser marking technology that can be applied on nearly every plastic. Its superior contrast and definition make it suitable for processing a variety of plastics, and high marking speeds are possible.

From Project to Business--Call in the Professionals

Grown-up businesses require a more risk-adverse attitude, and careful implementation of and adherence to established policies and procedures (Figure 4). Concern for sales growth is replaced by a focus on profit, and the creation of new revenue streams is replaced by a focus on growing "traditional" revenue streams. Thus, rather than consultants, "insultants" are needed--people completely focused on the business and unafraid to comment on things they do not agree with.

Figure 4.--From Start-up to "grown-up," a
different management style is required.

Intrapreneurs

* Consultants are needed.
* Sales orientation.
* Create new revenue streams.
* Encourage rapid decision-making.
* Stimulate risk-taking attitude.

Professionals

* "Insultants" are needed.
* Profit preoccupation.
* Grow traditional revenue streams.
* Adhere to established policies and procedures.
* Manage risk within boundaries.

DSM's venturing and business development model requires the ability to face up to challenges. Managers must:

* Dare to decide.

* Attract the right people.

* Manage and meet expectations.

* Make sure that knowledge flows.

* Balance financial and strategic goals.

* Actively manage portfolios.

* Prove the sustainability of corporate venturing in the chemical world.

* Put "open innovation" into practice.

Examples of fully grown businesses:

* Dyneema Purity is a highly purified grade of Dyneema fibre that was developed specifically for use in medical applications where maximum strength and minimum weight are required. It is ideal for orthopedic implants, for example, as it allows smaller implants to be used, and is flexible and resistant to abrasion. Similarly, its strength means it can be used for surgical instruments for minimally invasive procedures.

* Solupor is a strong, high-performance microporous film available in a variety of pore sizes and thicknesses. It is used in batteries, filtration, fuel cells, composite membranes, and transdermal drug delivery systems.

Since its formation in 2001, DV&BD has successfully created value for DSM, remaining true to its principles while constantly evaluating and adapting its own business procedures. In 2004, DV&BD concluded that, in order to create maximum value, it should focus its efforts on intensively developing a small core of carefully selected projects--those offering the best cost/ benefit ratio. Every effort was made to improve innovation rates, including increasing collaboration with external partners.

Successful, profitable innovation depends upon teamwork and an intrapreneurial culture. It is not enough simply to identify technologies that are ripe for innovation--to create real value, it is necessary first to identify what is needed in particular market segments and then to identify which technologies can be adapted or developed to meet this need. Value creation requires a coherent strategy.

As DSM understands innovation, it is a culture, not a process.

Driving Evolution

Over more than a century, DSM has managed to adapt swiftly and profitably to changing market demands. Initially a coal mining company, DSM soon identified the opportunity presented by coke oven gas, a by-product of its coal-processing business. The hydrogen from the waste gas was mixed with atmospheric nitrogen to produce ammonia, which in turn was used to make nitrogen fertilizers. By 1950, DSM was one of the leading manufacturers of both fertilizers and other agrochemicals. Meanwhile, the company saw the opportunity to broaden its chemicals portfolio further by exploiting other by-products of the coking process to make raw materials for synthetic resins, yarns and fibers.

Although the discovery of natural gas in the Netherlands in 1959 accelerated the decline of the mining business, DSM had anticipated this change. While the erosion of a core business would have proven fatal to many companies, DSM instead transformed and then expanded its business. As coal production declined throughout the 1960s, the company transferred its focus to its chemicals business, which was growing rapidly. By 1970, chemicals and fertilizers comprised DSM's chief activity, accounting for two-thirds of its sales. DSM also recognized that the global demand for plastics was on the increase. In just 12 years, profits from raw materials for plastics increased by a factor of 14. At the same time, the company explored new fields, synthesizing organic chemical products such as raw materials and additives for pharmaceuticals, foodstuffs and animal feed.

Modern Chemical Company

By the 1980s, DSM had changed beyond recognition. Between 1960 and 1970, the contribution of chemicals to sales had more than doubled, while that of materials for plastics and fibers had increased tenfold. A radical reorganization turned DSM into an efficient and modern chemical company--one that could operate successfully in increasingly global markets.

In 1989 DSM was privatized and listed publicly, ceasing to be state-owned. During the 1990s, the company paid greater attention to creating a balance between commerce, research and developing value-adding processes and products, particularly products for the pharmaceutical and the food industries and performance materials for the automotive and transport industry and the electrical and electronics sector.

Specializing in Value Creation

In 1995, DSM's overall sales for its four clusters (petrochemicals, performance materials, industrial chemicals, and life sciences products) totaled 4.5 billion [euro]; by 2000, this had almost doubled to 8 billion [euro] through a combination of organic growth and acquisitions.

In 2002, in anticipation of future market movements, DSM divested its petrochemicals operation. This was followed by the 1.75 billion [euro] purchase of Roche's Vitamins & Fine Chemicals Division in October 2003. This acquisition was a crucial element in DSM's corporate strategy, aimed at providing a solid platform for ongoing, market-oriented innovation in special nutritional ingredients. The portfolio change/rejuvenation--called Vision 2005--was recently completed by a performance materials acquisition: DSM paid 515 [euro] in cash to Avecia for NeoResins.

Pharmaceutical ingredients, food ingredients for human use and animal feed ingredients now each account for some 30 percent of life sciences sales, which average more than 4 billion [euro] per year. DSM's Life Science Products cluster, which includes five business groups and the former Roche activities, renamed DSM Nutritional Products, is the world's largest supplier to the life sciences industry.--R.K.

Robert Kirschbaum is vice president, innovation at DSM Venturing & Business Development, Heerlen, The Netherlands. He is co-inventor/developer of Dyneema[R] super-strong fibre and founded DSM Solutech, the manufacturer of Solupor[R], a microporous specialty film. He served as general manager of the worldwide Polyamide 4.6 (Stanyl) business in the early 1990s, and since 1997 has been in charge of DSM's corporate new business development. He graduated from the Technical University of Delft (The Netherlands) as a chemical engineer. His article is adapted from his presentation to the Industrial Research Institute Annual Meeting in Marco Island, Florida, May 2004.

robert.kirschbaum@dsm.com; www.dsm.com/dvbd