The key to sustainable performance
How DSM broke the annual strategy routine
What is the key to sustainable performance? Performance management is not only about defining financial targets. It is also, and perhaps even more so, about generating and implementing strategy and ensuring performance delivery. For Professor Philippe Haspeslagh, successful companies strike a balance between building for the long and medium term and delivering in the short term. “DSM is a prime example of how to strike this balance by creating a meaningful process that moves away from routine, engages all parties involved and thus stimulates ownership of strategy and execution.”
Different purpose, different process
Haspeslagh: “DSM is absolutely right to make a clear distinction between corporate and business strategy dialogues (BSDs and CSDs; see sidebar). They have a different purpose. Corporate strategy is essentially about shaping the long-term future, making choices about portfolio composition, investment priorities, geographical presence, etc. When developing a business strategy you assess the competitive environment of a specific business entity and your capabilities to compete successfully. Based on this analysis, you then make choices as to which segment you wish to compete in and determine the resources and steps required to achieve sustainable leadership in that particular segment.”
“What successful companies have in common is that they approach the strategy development process in an extremely structured and disciplined fashion,” explains Haspeslagh. The BSD process at DSM being managed by a trained facilitator, for example, is a case in point.”
Haspeslagh has found that many companies have a more or less formalised business strategy development process, but very few apply similar discipline to their corporate strategy development. “As a result, corporate strategy is often little more than the sum total of the business strategies. Not so at DSM, as Hein’s example demonstrates.”
Issues on the table
Haspeslagh: “For strategy development to be effective, it should be issue-driven. DSM for one has understood this well. Most time is spent on defining the issues, in the BSD as well as in the CSD.”
What is it about DSM’s CSDs that is so powerful? “Bringing about change in response to a crisis is one thing; changing in the absence of such a burning platform is a totally different matter. And that’s the strength of these CSDs: they approach change proactively rather than reactively. Their impact on DSM’s identity has been huge (see sidebar). That said, I believe it’s important to maintain a rhythm in strategy development, as DSM does, in order to stay proactive.”
He also points out that because DSM has built a track record of delivering on its strategy, it has also gained credibility with both internal and external stakeholders.
A winning combination
Performance management contracts have been instrumental in delivering on strategy. As Haspeslagh explains, a performance contract brings together two dimensions that are usually difficult to combine: “On the one hand, it establishes mutual engagement and accountability between the corporate level and the business entities. On the other hand, there’s a time dimension, i.e. it ensures equal attention for both the implementation of the strategy and the delivery of short-term results.”
Hein Schreuder joined DSM in 1991 as Executive VP Corporate Strategy & Acquisitions. At that time, DSM was still a chemicals company and the early 1990s were difficult times for the industry. Until then DSM had used a traditional strategic planning process that had become a routine periodic numbers exercise.
Schreuder: “The link with our performance wasn’t clear and it didn’t highlight the strategic issues for our business.”
Can we decentralise strategy?
Over the years, DSM had been decentralising its organisation as much as possible. Decentralising strategy development seemed the next logical step.
“The new strategy development process we launched was dubbed business strategy dialogue (BSD). We experimented with a few pilot projects and developed a structured, phased approach, starting with a thorough analysis of the business situation and issues. These pilots were a success and the entire Group subsequently embraced the concept. We therefore abolished calendar-driven strategic planning: these BSDs would be organised only if a business entity felt its strategy needed to be reviewed. BSDs also turned out to be great team-building exercises.”
Entering into a CSD
The success of the BSD also prompted DSM to improve its corporate strategy development process and in 1994 it organised the first so-called corporate strategy dialogue (CSD). Why two separate processes?
“Because what’s good for a business entity is not necessarily good for DSM as a Group. For example, we divested Curver in 1997, not because we didn’t agree with its business strategy, which was to scale up and strengthen its retail power, but because we felt consumer plastics weren’t a core business for DSM.”
Just like a BSD, a CSD starts by defining the strategic issues. CSDs take place every three to five years, depending on the scope of the previous one, and take about nine months to complete. The corporate strategy is then implemented in the years following the CSD. So far, on each occasion, DSM has managed to achieve most of its strategic goals before the target date.
“Since 1994, 83% of our portfolio has changed as a result of these CSDs and we have transformed from a chemicals group into an organisation focusing on the clusters ‘life sciences’ and ‘material sciences’,, which has greatly reduced the cyclical nature of our business. To ensure new business generation, our 2005 CSD also defined what we call emerging business areas, i.e. areas we expect to add to our portfolio in the longer term, say ten years. From a list of thirteen, we chose four to pursue, two of which have become successful in the meantime, i.e. biomedical materials and bio-based products and services. Strategic decisions like these would never result from a BSD.”
From strategy to performance management
And it doesn’t stop with strategy development and implementation. How did they translate strategy into performance management?
“From the outset we had our annual strategic reviews every fourth quarter, but it quickly became apparent that this wasn’t enough. That’s why each BSD now results in a strategic value contract (SVC), translating strategic choices into measurable targets for the next three years. Key success factors, performance indicators and milestones monitor the strategic goals, and financial metrics broken down into value drivers are used to evaluate bottom-line results. Each SVC is expressly approved by the Managing Board and is a true performance contract in that the business commits to executing the strategy and delivering the performance, while the Board commits to providing the necessary resources.”
Does this mean that there is no room for out-of-scope investments? Schreuder smiles: “No, only then they have to make their point slightly more convincingly.”
The goal-setting process preceding strategy development often receives scant attention. Not so at DSM, where it is incorporated into the CSD. In “Managing for Performance Excellence” (which is available in the book store beginning of May), Professor Haspeslagh elaborates on this process and provides other examples to illustrate the importance of intelligent strategy development.
The book also contains a detailed description of the highly successful BSD process and the SVC.