In October 2005 DSM defined its Vision 2010 – Building on Strengths strategy. The mid-term evaluation, originally planned for 2008, was brought forward to 2007. The company’s strategic direction and priorities were scrutinized, and progress made was evaluated. DSM is convinced that it has chosen the right strategic direction with Vision 2010 and that its evolution towards a Life Sciences and Materials Sciences company should be accelerated.

In this light a number of activities have been identified that do not fit in with the strategic thrust. These businesses will be carved out and divested to new owners for whom there is a stronger strategic fit and under whose ownership they can prosper further. These businesses, including DSM Agro, have been grouped in a new Base Chemicals and Materials cluster with effect from 1 January 2008.

DSM has concluded that the Citric Acid business will be better able to strengthen its market position and serve its customers in a partnership scenario. To facilitate the process towards an engagement with a third party, Citric Acid was carved out of DSM Nutritional Products and integrated into the Base Chemicals and Materials cluster as of 1 January 2008.

After studying all options it was concluded that the best way to generate maximum value from the Anti-Infectives business would be through a partnering strategy, possibly with partial disposals. As part of this strategy, DSM Anti-Infectives will be carved out into a separate entity.

DSM Fibre Intermediates, in 2007 part of Industrial Chemicals, will be reported in a new cluster, Polymer Intermediates. The activities provide backward integration for DSM Engineering Plastics and have a strong leadership position.

As of 1 January 2008, DSM has five reporting clusters: Nutrition, Pharma, Performance Materials, Polymer Intermediates and Base Chemicals and Materials.

A stepped-up search for acquisition opportunities will further accelerate DSM’s evolution towards a Life Sciences and Materials Sciences company. DSM will maintain its disciplined acquisition policy. Although DSM in principle wants to safeguard its current single A credit rating by the major rating agencies, DSM is willing to accept temporarily a deviation from single A ratios if an exceptional, strategically very attractive, large opportunity to strengthen the portfolio requires this. Even with the share buy-back program there is significant acquisition headroom available, especially considering the disposal program.

DSM’s shift will deliver faster growth, higher margins and improved earnings quality. At the same time the review confirmed DSM’s key strategic drivers of market-driven growth and innovation, an increased presence in emerging economies and operational excellence.

DSM aims for sales growth based on existing leadership positions, accelerated by innovation as well as selective acquisitions. This should lead to an annual organic sales growth of more than 5% per year. Organic sales growth in 2007 amounted to 7%.

Additional innovation spend in 2007 amounted to more than €50 million compared to 2005. In 2010 this amount will reach €70 million. DSM is fully committed to its Vision 2010 target of generating an additional €1 billion in sales from innovation by 2010.

The company is confident that the pipeline of products currently in development will enable this target to be met. In 2007 innovation-driven sales surpassed €350 million.

To create new business platforms for the medium and long term, four specific Emerging Business Areas (EBAs) were identified in 2005. An additional objective is that DSM should become an ‘intrinsically innovative company’, with excellent innovation practices and an above-average return on innovation investments and with employees to whom innovation comes naturally.

In 2007, further improvement practices and a uniform innovation reporting structure were implemented and a systematic approach towards building an innovation pipeline was adopted.

In these processes the DSM Innovation Center, established in 2006 to steer and monitor all developments in the innovation field, played a leading role. Furthermore, a large number of new people were hired throughout the company and actions were taken to be able to focus more specifically on DSM’s commercialization and launch skills.

To accelerate its innovation efforts, DSM continues to invest in emerging companies as well as in add-on acquisitions. In 2007 DSM acquired Pamako Engineering AG in Switzerland, owner of technology for the production of UHMWPE (Ultra High Molecular Weight Polyethylene) based products. This technology will be used by DSM Dyneema.

DSM Nutritional Products acquired the privately owned company Pentapharm Holding Ltd., a global leader in the development and production of active ingredients and system solutions for the cosmetics industry. The company is particularly well known for its capabilities in innovation, which have won it high regard amongst customers and strong brand recognition in the industry.

DSM Venturing invested in Harland Medical Systems, Inc., a US company that markets technologies and solutions in medical coating applications. It also invested in Food Quality Sensor International, Inc., a US-based company which develops and commercializes novel technologies to detect the freshness levels of perishable foods.

Furthermore, DSM Venturing invested in Jurilab Oy, a Finnish company specialized in the discovery of gene-disease associations and their application to healthcare. DSM Venturing also participated in an investment round in the Danish company Upfront Chromatography A/S, the world's leading developer of customized industrial protein chromatography processes.

DSM Venturing participated in a financing round in Ganeden Biotech, Inc., a US probiotics company which markets dietary supplements focused on digestive health. At the end of 2007, DSM Venturing announced an investment in Novomer, Inc. This US-based company is developing a technology platform to use carbon dioxide and other renewable materials to produce performance polymers, plastics and other chemicals. In addition to the investment, DSM and Novomer intend to sign a cooperation agreement.

DSM has also made additional investments in ventures in which it already participated and has invested in venturing funds.

An evaluation of the venturing activities resulted in a commitment to further expand DSM Venturing, as it has yielded positive results thus far, both financially and strategically. DSM has therefore earmarked up to €200 million for future venturing investments until 2012 and has also decided to consider investing in more grown-up young companies as well as in companies in the emerging economies.

DSM continues to experience strong growth in emerging economies. As a percentage of total revenues, sales in the emerging economies rose from 13% in 2006 to 15% in 2007. In line with DSM’s increasing internationalization, the company continues its efforts to accelerate the diversification and internationalization of its workforce.

In 2007 DSM once again invested heavily in China. The company announced the start of the construction of the DSM China Campus in the Zhangjiang Hi-Tech Park in the Pudong New Area of Shanghai.

DSM also announced the closure of the Gonglu site and the expansion of the site in Xinghuo, which will become DSM’s largest multi-product manufacturing location in China. At the Xinghuo site, the production of vitamins, intermediates and Teavigo^® (the pure and natural green tea extract) will be expanded. Furthermore, as a strategic site Xinghuo will also host activities of DSM Desotech, Sizings & Binders (both part of DSM Resins) and the savory ingredients plant of DSM Food Specialties.

In Jiangyin DSM will increase its engineering plastics compounding capacity by 50%. In addition a new Akulon^® plant is being built there that will commence operations in the course of 2008.

Over the past few years DSM has been experiencing growth rates in China of around 20% per year. Sales in China in 2007 amounted to USD 956 million, 23% more than in 2006. This has enabled us to raise the 2010 sales target for China from USD 1.0 billion to USD 1.5 billion.

In China, DSM continues to seek government approval for two joint ventures with North China Pharmaceutical Group Corporation Ltd. One joint venture is in the area of nutritional products (especially vitamin C and B12) and the other for anti-infective products (especially beta lactam antibiotics).

In 2007, DSM invested in a new plant for engineering plastics compounds in the Ranjangaon MIDC industrial zone, near Pune (India). With regard to Brazil and Russia, business opportunities were charted in 2007 and various investment decisions will be taken in 2008.

Operational excellence continues to be an important area in the pursuit of sustainable value creation. DSM enjoys a strong track record in establishing efficiency enhancements which clearly represent step changes in performance and add to the bottom line.

DSM remains wholly committed to the pursuit of operational excellence and intends to continue and further strengthen the program with new initiatives in advanced manufacturing (for example yield improvements and energy savings), commercialization (product launch program) and pricing (Excellerate program).

Mid 2007, the outcome of the strategic review of DSM’s anti-infectives business was announced. DSM concluded that the greatest value would be generated through a partnering strategy, possibly involving disposals combined with innovation initiatives and further profitability-enhancing measures. In 2007 progress was made with the planned carve-out of DSM Anti-Infectives.

In the summer of 2007 DSM launched a comprehensive profit improvement program at DSM Nutritional Products that will run through 2009. A mix of cost savings and increased profits from higher revenues is expected to deliver an annual minimum of €100 million in improved profitability by 2010. This will enable the Nutrition business to achieve the targeted EBITDA margin level of at least 18%.

In the second year of Vision 2010 – Building on Strengths, DSM once again created value. The CFROI (Cash Flow Return on Investment) amounted to 8.3%. This means that DSM achieved a CFROI that exceeded the annual weighted average cost of capital (WACC) by 80 basis points. The – revised – target aims for a difference of 100 basis points.

The EBITDA / net sales margin targets set per cluster

By realizing the Vision 2010 targets, DSM intends to achieve a total shareholder return that exceeds the average of its peer group.