Essay answering discussion questions over a case study on stamypor
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[email protected] or 617.783.7860. S w 905M72 STAMYPOR Rein Neiland, Inge Leuverink, Femke van Hoven and Marijke van Wely prepared this case under the supervision of Professor Wim Vanhaverbeke solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail
[email protected]. Copyright © 2005, Ivey Management Services Version: (A) 2005-10-27 For a while now, Rein Nieland, project leader at DSM-New Business Development (DSM-NBD), had been thinking about what to do with his project. Four years ago, in 1995, he was assigned to a promising new type of resin, called Stamypor. This new product was thought to add value in the resin-converting industry. Together with his project team, he had been continuously occupied with researching Stamypor’s market potential and improving its production process. It was one of the first projects to be evaluated by New Business Development (NBD), a recently set up unit at DSM. Stamypor was only one example of the many highly innovative projects at DSM. For a large diversified company, such as DSM, it was especially important, but at the same time, difficult to identify the demand of various markets and to react to changes in demand. DSM was aware of this complexity, and therefore acknowledged the importance of innovative new projects. Nieland knew a decision had to be made about Stamypor’s future. Many factors influencing this decision were going through his mind. He wondered if Stamypor met the requirements of a successful NBD project. He doubted if Stamypor added enough value to the resin industry. Furthermore, knowing that large sums of money had already been invested in the project, and that even more investments would be required in the future, he tried to determine if the market potential was large enough to justify these investments. He had to come to a conclusion about Do N ot C op y or P os t This document is authorized for use only by Rajiv Shah at University of Texas at Dallas until September 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860. Page 2 9B05M072 Stamypor’s future, as top management expected a decision from DSM-NBD before the end of the week. DSM CORPORATION DSM was founded in 1902, as the Dutch State Mines. Despite its name, the company had neither been active in coal for decades, nor was it government- owned anymore. In the 1960s it had become clear that coal mining was not a profitable growth area any longer, and therefore the company started diversifying into fertilizers and chemicals. This change had not been easy, as it required a different culture as well as different specialized technical know-how and market skills. DSM managed to prosper and grow, even though it was still vulnerable to economic cycles. To reduce this dependence, DSM expanded into niche and speciality markets in the mid-1980s. By the year 2000, DSM counted 16 business groups that were grouped into three main clusters. The first cluster, Life Science Products, had four business units — they were called Business Groups (BGs) at DSM. Life Science Products produced products for the pharmaceuticals and food industries. Through mergers and acquisitions in the life science products and performance materials industry, DSM wanted to achieve a leadership position in this market. Life Science Products was expected to account for more than 30 per cent of all sales in the near future (see Exhibit 1). The second main cluster of DSM, Performance Materials, also consisted of five business groups. This cluster focused on producing high-performance materials for the automobile and electronics industries. Performance Materials accounted for 30 per cent of corporate sales. The third cluster, Polymers & Industrial Chemicals, was composed of six business groups. These business groups produced mainly bulk chemicals that were sold in large volumes for low prices. These chemicals were all intermediary products based on oil or gas and therefore strongly subject to economic cycles. This cluster was expected to account for 40 per cent of all sales in 2002. DSM’s strategy for the first years of the new millennium was to focus on core activities in which it had, or could secure, leading and profitable positions. The strategy included a shift towards activities that would generate more stable results. Therefore, the company was accelerating growth in Life Science Products and Performance Materials through a series of acquisitions. Despite the Polymers & Industrial Chemicals cluster being sensitive to cycles, on average, it showed excellent profitability. Management at DSM believed that they could shift core competencies from bulk chemicals and materials to life science products and performance materials. This move also implied a shift from selling commodity- Do N ot C op y or P os t This document is authorized for use only by Rajiv Shah at University of Texas at Dallas until September 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860. Page 3 9B05M072 like products to selling innovative products that delivered high customer value (see Exhibits 2 and 3). Besides the business groups, DSM also had some functional units that supported the business groups: Research & Development (R&D), Human Resources, Finance and Strategy. New Business Development In the early 1990s, R&D at DSM was organized as in most diversified multinationals. Each business unit had its own R&D, which was, in most cases, preoccupied with ongoing and incremental innovations. There was also a corporate R&D centre that carried out research for the BGs (± 80 per cent of its budget). The remaining 20 per cent of the budget was financed by the managing board as support for fundamental research and innovative projects that were considered to be of strategic value for DSM. This set-up seemed to work well but, like other chemical companies, DSM was confronted with the growing gap between fundamental and applied scientific research on the one hand, and industrial research and application of the results in existing chemical companies on the other. At that time, there was no organizational answer for how to bridge that gap. Gradually the idea emerged that a separate unit — DSM-New Business Development — was necessary to commercialize successfully radical new technological innovations. The installation of DSM-NBD created the possibility of responding flexibly to the findings of fundamental research with investments to stimulate further development. NBD became fully operational in 1995, and was managed by Rob Kirschbaum, the director of the NBD Corporation. The main idea behind NBD was that it could work on product development projects that were out of the scope of the Business Groups (BGs). BGs were profit centres that were, in many cases, reluctant to develop innovative products because they presented too much risk for them: either because the technology was still in an embryonic stage or the market was too new and therefore too risky. Their financial horizon was too short to get engaged in risky projects that became profitable only after five to 10 years. As a result, BGs focused more on current and extended technologies and markets while NBD focused on new technology or new markets However, NBD did not work on projects that both had a new market and a new technology, because this was considered to be too risky (see Exhibit 4). In the organizational diagram, NBD was closely related to Research. A project manager of NBD could use offices and employees from Research, which had the advantage of creating more flexibility in the organization of a project. It was also a cost-efficient way of working, as a project often did not have enough work for a Do N ot C op y or P os t This document is authorized for use only by Rajiv Shah at University of Texas at Dallas until September 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860. Page 4 9B05M072 full-time employee. However, NBD was still managed as an independent unit and a separate legal entity within DSM, which reported to the NBD board. This board consisted of representatives of Corporate Research and Corporate Planning and was supervised by a member of the Managing Board (see Exhibit 1). As NBD was a separate legal entity, it profited from tax benefits, but it was also an advantage to secure its autonomy and flexibility and to establish relations with business partners from outside DSM. NBD had been founded in order to create new and sustainable businesses in the long run, by scanning ideas from various sources and developing the most promising ones. The stage-gate process monitored the process from idea generation to small start-up companies, which was NBD’s core competence. Every stage evaluated the progress of a project (see Exhibit 5). DSM management believed that developing new businesses could be realized most efficiently by evaluating projects at several predetermined points in time. By introducing various decision moments, the stage-gate approach reduced the risk