Strategic focus areas
As part of the corporate strategy development process we carried out in 2012, we identified five key focus areas. The following is a brief description of accomplishments in 2014, along with plans for 2015 and beyond for each of the five areas.
Care for the customer
AkzoNobel holds many market leadership positions. In order to maintain these positions, we have identified organic growth as one of our priorities. In 2014, we made some progress in terms of organic growth, with volume growth of 1 percent for the company as a whole. However, there is still considerable room for improvement.
The starting point for organic growth is care for our customers. It begins with a deep and profound understanding of our end-user segments, which translates into an understanding of customer needs, such as product performance, service levels, sustainability and price. This in turn drives our product and service innovation approach and our product and margin management programs, which combine to ensure that we move closer to our vision of delivering leading performance from our leading market positions.
In 2014, a key area of activity in terms of care for the customer was in the development of strong processes in Marketing and Sales through our commercial excellence programs. These programs differ per Business Area, but we have created an overall corporate framework to ensure efficiency and create consistency where this makes sense. One example of this is the measurement of customer satisfaction levels, where we have agreed company-wide to a four-pronged approach which measures customer satisfaction in terms of:
- The service we provide via on-time in-full (OTIF) measures
Information is gathered daily or weekly at production sites and deviations trigger corrective actions by local management, with overall figures reviewed regularly at the Business Area and full company level
- The way we address customer questions and concerns
We measure this as a combination of issue frequency and response time for resolution. Local management teams regularly review these data and ensure that root cause investigations are carried out to resolve issues and improve future service and satisfaction
- Our understanding of customers’ broader expectations and concerns, with consequential improvements in products and services
We assess performance through market research, customer discussions and specifically targeted customer surveys. Results are regularly reviewed at Business Area and full company level
- Customer loyalty levels
Every day, our front line sales, customer service and supply chain employees contribute to our success in the market, however, this is often difficult to measure in a meaningful way. To address this, we have decided to use customer retention as a proxy measurement for customer loyalty. We believe that this is an appropriate choice because customers do have alternative sources of supply in almost all of our businesses
Further development and implementation of our commercial excellence programs will continue to be a major priority for AkzoNobel in 2015 and will be a fundamental factor in achieving higher organic growth levels in the future.
Reduction of product and process complexity
Standardization and simplification of our processes is vital to achieving our vision and targets, as it will lead to a faster, more agile organization and reduced costs and resource use. In addition to improving our product portfolios through product and margin management, and our Marketing and Sales processes through commercial excellence, we are also reducing complexity in our raw material slates and in our processes throughout the value chain.
In terms of raw material slates, our ambition is to create a future-proof raw material portfolio. This means that we will address the sustainability aspects while we reduce the number of raw materials we use significantly, without compromising the quality of our products. This has now been achieved in our paints and coatings businesses through the definition of raw material slates covering resins, pigments, solvents and additives. Furthermore, a rigorous, cross-functional process has been defined for the introduction of new raw materials.
In 2014, a key area for process complexity reduction was in the implementation of the AkzoNobel Leading Performance System (ALPS), a fundamental change to the way we work in the Integrated Supply Chain. This company-wide framework of standard processes and tools helps us drive targeted improvements for cost productivity, reduced resource use, on-time in-full (OTIF) customer service and competitive position, based on a continuous improvement approach. We are already seeing positive results in early ALPS production sites, including considerable and simultaneous improvements in volume, equipment utilization, OTIF, manning levels and employee engagement.
We also made substantial progress in terms of process complexity reduction in Global Business Services (GBS), which covers functional support activities such as Human Resources, Finance and Information Management, as well as non-product related Procurement. Specifically, in 2014, we consolidated most of the transactional activities related to these functions into regional hubs. These shared services and expertise centers will service all AkzoNobel businesses in a standard, cost efficient manner. In Finance, our financial transaction handling processes are being standardized across the world, while in Information Management, we are creating a more simplified and uniform ERP landscape.
Cash and return on investment
One of the key issues in our strategy is the need to be more cash generative and improve our return on investment. This strategic focus area is supported by a strong record of operating working capital management. In addition, over the last few years, we have improved our capital expenditure management processes significantly, based in part on our end-user segment analysis, which highlights more attractive growth opportunities. Better capital expenditure management is also supported by the differentiated growth strategies developed in all three Business Areas and described in the Business performance section of this Report 2014.
In all three Business Areas, we have continued to take action in terms of operating efficiency. We are already reaping some rewards of our restructuring programs, as evidenced by our improved return on sales and investment in 2014. Going forward, we will need to maintain this strong base of operating efficiency via the Continuous improvement process, which will help us to counteract inflation and other cost increases.
While we are taking a focused approach to performance improvement to support this strategic focus area, we remain acutely aware of the sustainability and financial consequences of our investment and performance improvement decisions. As has been the case for a number of years now, all significant (greater than €5 million) investment proposals require a sustainability evaluation, which includes assessment at different stages in the project development. This sustainability assessment covers eco-efficiency, health and safety, process and product safety, natural resource and raw material requirements, and environmental impact.
Embedded safety and sustainability
We continue to be viewed as a leader in sustainability. In 2014, for the third year in a row, we were ranked top of the Materials industry group on the Dow Jones Sustainability Index. We have now been ranked in the top three in our sector for the last nine years. While we remain proud of these accomplishments, we are committed to improving even further in order to achieve our sustainability targets. For example, in 2014, we achieved our 2015 target of a total reportable injury rate (TRR) of less than 2.0 per million hours worked and, therefore, we are now striving to go beyond this target in 2015.
To help drive improvement going forward, we introduced our Planet Possible sustainability agenda in 2013, focused on radical resource efficiency throughout our entire value chain. There are three main pillars to this agenda, which build on our sustainability foundations. More information on the three pillars and sustainability foundations follows:
By working together with customers and suppliers, we aim to develop leading solutions that create more value from fewer resources. In particular, we are focusing on developing and marketing solutions that have a social or environmental sustainability advantage for our customers when compared with competitive products. For example, in 2014, we announced the world’s first coating for cold drinks paper cups which allows them to be composted or recycled. The product adds to an already long list of products in our Performance Coatings Business Area that help our customers, or our customers’ customers, to reduce their environmental impact while generating meaningful revenue and other benefits for AkzoNobel.
In addition to measuring the percentage of our revenue that comes from eco-premium solutions with a downstream advantage, we also measure our progress against this aspect of our sustainability agenda using a resource efficiency index (REI). We developed this indicator to measure how efficiently we generate value, and defined it as gross margin divided by cradle-to-grave carbon footprint.
This pillar is focused on improving material efficiency across the value chain, and increasing our use of renewable materials and renewable energy to create more value from fewer resources. It is important to note with regard to this metric that a reduction in carbon footprint and a reduction in costs often go hand-in-hand. For instance, we are in the process of exploring opportunities for conversion of biomass facilities from electricity to steam in our Delfzijl chlor-alkali plant, doubling energy output from the same renewable resources with both cost and footprint reduction implications.
We monitor progress against this aspect of our strategy by looking at the efficiency of resource and energy use across the entire value chain, measured by carbon footprint reduction. It is therefore important that we achieve the kind of improvements described above both within and beyond our own operations. For example, upstream in the value chain we are continuing to look for opportunities to use renewable or lower impact raw materials. As a result, in 2014, we announced an expansion of our existing joint development agreement with Solazyme. This will provide for funded development and a multi-year supply of renewable algae-based oils. These oils would replace petroleum and palm oil-derived products used to manufacture surfactants, one of our main Specialty Chemicals product platforms.
Capable, engaged people
The focus of this pillar is on developing our employees and also forming partnerships along the value chain to create more value from fewer resources. In 2014, we made a significant and visible step in terms of external partnerships as part of our Human Cities initiative.
Our focus on Human Cities stems from the fact that a significant percentage of our business comes from products and services that are linked to the urban environment. Based on six key pillars, the initiative is designed to help urban areas become more inspiring, energizing and vibrant for people across the world. We want to go beyond the purely functional or technological aspects and help cities become more human. The six pillars we have identified are color, heritage, transport, education, sport and leisure, and sustainability.
This determination to help cities meet the challenges they face was underlined in September when we made a commitment at the Clinton Global Initiative Annual Meeting in New York. Designed in collaboration with The Rockefeller Foundation’s 100 Resilient Cities program, our commitment includes developing an urban resilience guide for cities and staging “Let’s Colour” projects in four of the cities involved in the 100 Resilient Cities program. In addition, we will make our expertise in paints, coatings and chemicals available to the program’s advisory committees.
Our Human Cities activities will build on, not replace, existing activities in terms of external outreach. So we will continue to work with key suppliers and customers to develop solutions, as well as working in the communities we serve through our Community Program and “Let’s Colour” campaigns. Internally, we will continue to enable our employees to deliver more value from fewer resources by embedding sustainability in our Talent management process.
The three pillars of our Planet Possible agenda build on the company’s core principles in terms of safety, integrity and sustainability. From a people safety perspective, our Life-Saving Rules and behavior-based safety programs have provided a strong base to help us achieve our 2015 safety target in 2014 and also for continuous safety improvement going forward. We have also made considerable strides in the development of process and product safety procedures (described in more detail in the Processes and capabilities chapter).
We use our routine management cycle to review progress against our sustainability targets and we continue to put tools in place to help our employees make progress against our Planet Possible agenda. For example, we are currently piloting a new sustainability improvement toolkit. This toolkit includes a self-assessment audit, a methodology for target setting based on company requirements and business priorities, and an approach for developing appropriate plans to get from the current level of maturity to higher levels.
Diverse and inclusive talent development
To address our other four strategic focus areas, we need the active participation of a strong and motivated workforce which reflects the diversity of the end-user segments we serve. We will gain this active participation by increasing employee engagement and providing continuous learning and development opportunities. This will create a work environment where people can perform to the best of their ability while ensuring that our management layers reflect the diversity of our overall workforce.
In 2014, a fundamental part of our activity in terms of improved employee engagement was based on the full roll-out of our core principles and values. Throughout the year, we held thousands of meetings and workshops where we identified how the behaviors related to our new values could support us in achieving our goals. We also integrated the core principles and values into all of our main HR processes, including recruitment, our new leadership talent assessment process and our employee performance evaluation. Pulse surveys indicate that these core principles and values are well understood today by our employees, and also that they are a very positive motivating factor.
We also believe that the core principles and values contributed to the improvement we saw in our 2014 ViewPoint employee engagement survey, compared with 2013. While we are pleased to see this improvement, we recognize that we still have some way to go in order to achieve top quartile engagement levels. In 2015, our focus in terms of improved engagement will be on living the core principles and values, including recognizing and rewarding role models and supporting improvement where this is necessary.
Our work will be supported by continued roll-out of the integrated Talent management process, which was introduced in 2013. This process (which is described in more detail in the Processes and capabilities chapter) is intended to bring increased objectivity to talent identification, as well as a more targeted approach to the development of leadership potential and increased process transparency. This more active approach to talent management will also focus on the appreciation of the added value that can come from diverse teams.
With regard to increased diversity, we actively redressed the gender balance in our senior management layers by appointing Maëlys Castella as our first female Chief Financial Officer, and our first female member of the Board of Management. Her appointment sends a clear signal that we continue to take diversity seriously at AkzoNobel and are continuing to make progress towards our targets in this area.