Give us a brief introduction to yourself and your current role as a member of the executive committee at DSM?
I am a biochemist, a PhD in molecular biology, and while I was working got an MBA, so I have both a scientific and a business background in terms of education. I started with a biotech company in the Netherlands, had several roles both in R&D as well as in businesses and was taken over by DSM in 1998. I have since been part of the transformation of DSM. In my job before this one, I was running the food specialities business of DSM, and I am now, for more than 10 years, the chief innovation officer, and for the past two years also part of the executive committee of the company.
Reflect on your innovation and venturing models, how they have changed over the past five to 10 years.
DSM has corporate strategy dialogues every five years. Last time we spoke we were in the middle of one that ended in 2015, and everybody expected us to have another next five-year plan, so to speak, until 2020. Interestingly enough, we broke tradition, and we now have a three-year strategic plan to the end of 2018.
There are a couple of reasons for that, some internal, some external. We had a couple of hedge funds into the company putting pressure on everything, trying to split it up. Fortunately, as a Netherlands-listed company, we are a bit protected against such attacks. But of course it also makes you think: “Why is this happening? Are we doing all the things right?”
It is fair to say that over the past couple of years we have invested a lot in what you could call purpose, so doing right for the world. It is part of our strategy to make the world a better place, for people today, for generations to come. We are focusing on renewable fuels and looking at climate change in general. We are looking at feeding the world and treating global nutrition issues. That has all stayed, but you could say we had lost, in all of that, a little bit of the view on the financial ratios, and that then attracts people who want to break you up and make money in the short term.
In our current three-year cycle, we are improving our ratios again, improving the profitability, not jeopardising the future, and continuing to invest in innovation and the longer term. I am proud of DSM as a company, that although we may now have a focus for the shorter term on getting the finance right and improving those ratios, we continue to invest in the future and the longer term.
You look at investments in funds, direct investments and development in emerging business areas. Give us an indication of the size of those different parts of the portfolio.
Part of our innovation centre is aimed at making the whole company better and faster at innovation, and educating people and so on. We also have support for that through an excellent innovation group. The chief technology officer is with me to make sure that the quality of the R&D is in shape, the intellectual property and licensing – and of course corporate venturing. That is more or less to make sure that 75% of what we spend on innovation and on R&D is managed well and better every year. We benchmark ourselves with the McKinsey benchmark and we have been over the past couple of years consistently in the top quarter.
Another function is shaping new parts for DSM outside the scope of the current business group, which is where we spend about 25% of our money. That basically runs first through an incubator where we assess ideas, and if they are sufficiently attractive and sizeable, we promote things to what we call an EBA – an emerging business area. At the moment we have three of them, one in biomedical materials and medical devices, one in solar, and one in bio-based products. In the next strategy period, one or two of the current EBAs might go out of the innovation centre, no longer needing the air cover, so to speak, and that then creates the room for new ones. .
I am directly responsible for those things that do not yet generate a lot of money in terms of turnover and earnings, but they will hopefully create a lot of value for DSM in future earnings. It takes 10 or 15 years before you have developed something from scratch to something that is really meaningful.
Which EBAs have become substantial and more significant within DSM?
I would say the one that will go out of the innovation centre first is the biomedical EBA. We had a bit of an issue last year with the leadership, and missed one interesting small acquisition that we were looking into. That would have probably brought it to a size that it could easily stand on its own feet, so we hope to do that this year or next. Iin this strategic period we will bring it to the point where it can fuel its own innovation. That is the main reason why we have the innovation centre, so the EBAs can go through this dip that is inevitable in terms of investing before you can harvest. By next year there should be enough earnings for the biomedical group to make its own money and to fund its own future.
I think solar will be soon afterwards. We just acquired a small group in China – more technology than turnover, but it looks very promising. I expect in the coming years that will also be grown up enough and profitable enough to fund its own future. That then creates space for the new EBAs coming out of the pipeline of the incubator.
Many corporates go into venturing with the perception they will make minority investments in startups, and then acquire those businesses on preferential terms. But you are developing those areas and then acquiring in parallel to these things from the knowledge you have gained.
That could be the case. Over time we have invested in about 50 startups. They serve different purposes. They help us find our way in new fields where we are not familiar. It sounds like a lot when you invest a few million in it, but if you see what we spend on R&D – somewhere between €450m ($500m) and €500m – spending a few million on an investment that gives you quite good insight in a new field is certainly worth it. I brings us market intelligence and technology intelligence. It is not always with the purpose of bringing those companies in.
We have quite a few examples where we had an agreement with the startup, for instance a distribution agreement, for a compound that they have developed and where we can use our global distribution network very well. A good example is one of the nutrition investments we made, and we now market a product called FoodFlow. The startup could never have done this globally – we helped the company by doing that. We never acquired the company, but while we are doing this, the value of the investment goes up, our product portfolio grows, and their expansion grows.
In biomedical it helped us to identify spaces where we want to be active and spaces where we do not. Of the 50 investments, we currently have 25 active in the portfolio. Some are no longer strategic, some are still very strategic. Over 10 to 12 years, we have acquired only three. With many more we had collaborations. It clearly helps to shape the total value chain – that comes from collaborations, from licensing, it comes from venturing, and also from small acquisitions.
I believe corporates now need to consider how they join up different technologies, different startups and partners to form what I term innovative new value chains. This is where new materials, the internet of things, new data, artificial intelligence, could be fundamentally changing the health industry, the automotive industry, the utility sector and many others. Is DSM seeing that change and capturing value along those new knowledge-intense products and services?
We have recognised this trend, especially in the EBAs I described, like biomedical and solar, and we have also built them basically from scratch, in the way you describe. It is more difficult to introduce that into a running business with more traditional thinking. Still, over the past couple of years, we have now also seen in our more traditional businesses that this way of thinking has been adopted – more partnerships, more joint ventures, more internal ventures based on new models.
Innovation speed is growing all the time, and it is obvious that most innovation and invention happen outside your company. That means you need an open mind, and an assessment of what is going on in the world. Where we can still do better, and I find it difficult, is how to introduce this whole new big data avalanche that is now taking place, and how to make sense of it and how to use it and how to reshape a more traditional business, even if we already many do things very differently from in the past. We need to connect data, internet of things, all of that, to shape new businesses.
How are you measuring financial and strategic performance in this current plan for DSM?
We always had a focus on achieving a certain level of innovation sales in a strategic period. But we have changed that to a percentage, because the company can vary in size when you do one or more portfolio shifts. We are now striving for at least 20% of innovation sales, meaning stuff introduced in the past five years. Every year a year falls off and a new year is added. That keeps the portfolio fresh.
Second, in the past we did not have margin requirements, but basically we say that the margin should be at least 5% to 10% better than the running business. That is actually consistently going on at the moment, so we are close to 10%. We really have the objective of making the world a better place. In the past we may have discussed things like eco-plus and people-plus concepts, basically meaning we want to have stuff in the pipeline that is either good for the planet or good for people. We have specific ways of measuring that, and the eco-plus part basically means that the footprint of the products that we sell should be better than the next available alternative from a competitor. In people-plus we have worked with other companies to define what that means, and that can mean an array of things and you can read a lot about it on our website. Also there we have found a way to measure it.
We say we should have an innovation pipeline in which between 85% and 90% of projects that are either eco-plus or people-plus or both. We have now brought our portfolio from 38% a couple of years ago to close to 60%. We will try to make our whole portfolio eco-plus or people-plus – that is an important driver for the innovation group in DSM.
To listen to this and other interviews on a podcast, subscribe at gaulesqt.podomatic.com. Andrew Gaule leads the GCV Academy, developing the capabilities and expertise of organisations leading open innovation, venturing and corporate venturing programs to drive strategic benefit. He also supports innovation programs and collaborations with “innovative new value chains” in global organisations. To contact Andrew Gaule and for future interview ideas email andrew.gaule@aimava.com or James Mawson at jmawson@globalcorporateventuring.com