11 Barry Juruzelski

8/2/2019 11 Barry Juruzelski

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Booz & Company Newport Beach, CA, February 17, 2011

How the To Innovators KeeWinning

e o a nnova on

This document is confidential and is intended solely forthe use and information of the audience to whom it is addressed.


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Barry Jaruzelski leads Booz & Companys Global Innovation

Barr Jaruzelski is a Florham Park, NJ-based artner who leads Booz & Com an s Global

Innovation Practice. He specializes in corporate and product strategy and the transformation

of core innovation processes for high tech and industrial clients. He previously served as thefirms Chief Marketing Officer. Executing the global roll out of the new brand.

A recognized thought leader, Barry is frequently quoted in publications like The Wall StreetJournal, the Financial Times, and The New York Timeson the technology industry and thechallenges of innovation. He often appears as an expert commentator on ABC News, CNBC,NPR, and the BBC. He has been a guest lecturer at Harvard, Columbia, Tuck, NYU Stern,and MIT Sloan business schools. He has also presented his research on the drivers ofinnovation success to the National Academy of Sciences.

Barry is a three-time recipient of the firms Professional Excellence Award, which is given inrecognition of outstanding and innovative client service. He has also received the firm's EagleAward for his outstanding contributions to the firm.

Barry is a member of the panel of judges for The Wall Street Journals annual Technology

Barry JaruzelskiPartner

Innovation Awards.

Booz - Innovation 1000 - IBF conf v3.ppt


3/23

For the past six years weve examined innovation spending and its

Progression of the Global Innovation 1000 Study

2005 2006 2007 2008 2009 2010

2009: ro ts own,Spending Steady

2005: oney sn tEverything

2006: mart pen ers 2007: e ustomerConnection

2008: eyon or ers 2010: ow opInnovators Keep

Winning

In innovation, moneydoesnt bu results.

Despite a big drop inoverall o eratin income,

High-LeverageInnovators, com anies

Two keys to success:ali nin innovation

The global footprint ofR&D. Com anies that

Which innovationca abilities the to

Ultimately, theprocess is moreimportant than theamount spent.

more than two thirds ofthe companies we lookedat closely eithermaintained or increasedtheir spending oninnovation.

that outperformed theirindustry peers on avariety of financialperformance metricswhile spending less onR&D.

strategy with overallcorporate strategy &getting customersinvolved in theinnovation process.

conduct more than60% of their R&Doutside their homecountriesoutperformed theirpeers

performing companiesprioritize and how theyare able to consistentlyoutperform.

Booz - Innovation 1000 - IBF conf v3.pptBooz & CompanyDATE

2


4/23

Innovation 1000 is ~1/2 of worlds $1 trillion spend on R&D

R&D S end b Industr - 2009 R&D S end b Re ion of HQ - 2009

Aerospaceand Defense Com utin4%

Consumer

2%

TelecomOther 5%

ROW1%

India/China$503B

7%

4%Software/Internet

and Electronics

27%

Chemicals

23%38%

JapanNorth America

($137B)($34B)

($191B)

($117B)

10%Industrials

and Energy

($37B)

15%

22%

Auto

Health 32%($113B)

($51B)


3

($73B) ($161B)


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Top 20 R&D spenders - ranks have shifted

2010Rank

2009Rank

Company Geography Industry%ge R&D

Spend Change2008 to 2009

2009 R&DExpenditure

2009 SalesRevenue

Intensity2009

R&D/Sales

Change inIntensity

FY 2008 to 2009

1 3 Roche Holding AG Europe Health 11.63% 9,120 45,306 20.13% 3.82%

2 4 Microsoft Corp North America Software/Internet 10.36% 9,010 58,437 15.42% 14.11%

3 2 Nokia OYJ Europe Computing and Electronics -0.99% 8,240 57,150 14.42% 22.51%

4 1 Toyota Motor Corp Japan Auto -19.77% 7,822 204,363 3.83% -13.09%

5 6 Pfizer Inc North America Health -2.59% 7,739 50,009 15.48% -5.93%

6 9 Novartis AG Europe Health 3.49% 7,469 44,267 16.87% -3.07%

- . , , . - .

8 10 Sanofi-Aventis SA Europe Health 0.17% 6,391 40,866 15.64% -5.77%

9 11 GlaxoSmithKline PLC Europe Health 12.69% 6,187 44,422 13.93% -3.26%

10 12 Samsung Electronics Co ROW Computing and Electronics 7.91% 6,002 109,541 5.48% -5.83%

11 5 General Motors Co North America Auto -25.00% 6,000 104,589 5.74% 6.83%

12 13 IBM North America Computing and Electronics -8.16% 5,820 95,759 6.08% -0.61%

13 14 Intel Corp North America Computing and Electronics -1.21% 5,653 35,127 16.09% 5.71%

14 23 Merck & Co Inc North America Health 16.82% 5,613 27,428 20.47% 1.58%

15 17 Volkswagen AG Europe Auto 3.58% 5,359 146,677 3.65% 12.07%

16 15 Siemens AG Europe Industries 3.07% 5,285 103,866 5.09% 3.97%

17 19 Cisco Systems Inc North America Computing and Electronics 1.07% 5,208 36,117 14.42% 10.65%

18 20 Panasonic Corp Japan Computing and Electronics -7.92% 5,143 79,994 6.43% -3.60%

19 16 Honda Motor Co Ltd Japan Auto -17.74% 4,996 92,516 5.40% -4.01%


4

20 8 Ford Motor Co North America Auto -32.88% 4,900 118,308 4.14% -17.67%

Total -3.67% 128,943 1,556,639 8.28% 3.61%R&D Spend % Change >10%

R&D Spend % Change < 0%


6/23

This year we also asked executives: Who is the most innovative

- , ,

Top 10 Most Innovative Companies Financial Performance of Most Innovativevs. Bi est S enders

Company2009 R&D

Spend ($US Million)

Innovation

1000 Rank

2009 Sales

($ US Million)

R&D

Intensity

1 Apple $1,333 81 $42,905 3.1%

80

67

Top 10 Spenders

Top 10 Most Innovative

2 Google ,2843 44 23,651 12.0%

3 3M $1,293 84 $23,123 5.6%

4 GE $3,300 35 $155,777 2.1%

5456

4250Industry

5 Toyota $7,822 4 $204,363 3.8%

6 Microsoft $9,010 2 $58,437 15.4%

7 P&G $2,044 58 $79,029 2.6%

35

Performance

8 IBM $5,820 12 $95,759 6.1%

9 Samsung $6,002 10 $109,541 5.5%

10 Intel $5,653 13 $35,127 16.1%


5

Sources: Bloomberg data; 2010 Booz & Company Innovation 1000 survey

Market Cap Growth(5-Year CAGR)

EBITDA as %of Revenue

(5-Year Avg.)

Revenue Growth(5-Year CAGR)


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Year after year weve found that higher R&D spending doesnt

The Performance DisconnectExample analysis showing link between R&D and financial performance

EXAMPLE ANALYSIS

~10,000 analyses found NOstatistical relationshipbetween R&D spend and:

y = 0.032x + 1.29142

=

5

IndexedSales Growth

Sales growth

Gross profit growth

Operating profit growth

.

Operating Margin

Net profit growth

Net Margin

0

0 1 2 3 4 5 6 7

Total shareholder return

-5 Indexed R&D / Sales


Source: Booz & Company Global Innovation 1000, 2006


8/23

While R&D $s dont ensure performance, there is a minimum

The Performance Disadvantage of the Bottom 10% of Spenders

1.9

1.71.7

1.9 Spending muchless than industry

1.0 1.0rm

ance

to consistentlylower performance

exedPerf Spending much

more than industrymedian does not

In

better performance

Operating Profit Growth Index Regionally Adjusted Shareholder Return Index

Booz - Innovation 1000 - IBF conf v3.ppt 7

R&D to Sales RatioIndexed Bottom 10% Indexed Middle 80% Indexed Top 10%


9/23

Innovation process, tools & culture matter MORE than R&D $s

Aligning InnovationStrategy with

Building the BestGlobal Network for

Leveraging Customer

Insight in Ideation

Making the RightBets Portfolio

Mana ement

Managing the R&DPipeline with Speed &

Efficienc



10/23

There are 3 fundamental innovation strategies:

Three Innovation Strategies Example Companies

Need Seekers Consistently strive tobe first movers; Proactively engagecustomers to determine needs and shapenew innovations; Determine new innovations

~25%

by surfacing unarticulated needs

Market Readers Adopt a 2nd mover

incremental change; New innovationsdetermined market back, with equal focuson competitors and customers

~25%

Technology Drivers Driveinnovation via new technologicalachievement; Leverage technology for bothincremental and breakthrou h chan e. The ~50%


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least proactive of the three strategies indirectly contacting customers.


11/23

Top 25% performers tightly align on a priority set of capabilities

Capability Sets Identified as Key by Top 25% Performers in Each Innovation Strategy

Key for category of capability Ideation Project Selection Product Development

Resource requirement management

Supplier/partner engagement in thedevelopment process

Market Readers

Rigorous decisionmaking

Market potentialassessment

All Three

Application of technologies and trends tonew products

Need Seekers

Detailed understanding ofemerging technologies and

Translation of consumer and customerneeds to product development

Customer engagement

Product Platform Management

Pilot selection/controlled roll-outs

Directly generated,deep customer insights& anal tics

Tech Drivers

trends Product lifecycle

management Open innovation

Technical risk assessment

Enterprise-wide productlaunch


10

Sources: Bloomberg data; 2010 Booz & Company Innovation 1000 survey


12/23

Top performers excel at some things, not everything

Top 25%

Relative Execution of Capabilities with the Innovation Value ChainPercent of Companies Rating Performance 4 or 5 (on scale of 1-5)

7968

5446 43

64

Bottom 25%

Top 25%

5757

39

57

46

5452

31

52

25

o om

2521

2525

Detailed

understanding ofemerging

Independent

competitive insightsfrom the marketplace

Deep Consumer

and Customerinsights/analytics

Open InnovationSupplier and distributor

engagement in ideation

Project resource

requirementsforecasting and

Technical risk

assessment /management

On-going assessment

of market potential

Rigorous decision-

making aroundportfolio trade-offs

Strategic disruption

decision making& transition planning

68 7171Bottom 25%

Top 25%

Product Development Capabilities

32

Top 25%

Bottom 25%

Commercialization Capabilities

50

39

50

18

39

2936

21

11

21

1411

47

1114

11

0


11

Supplier/partner

engagement in the

product development pr

Reverse engineering Engagement with

customers to prove

real-world feasibility

Product platform

management

Design for

specific goals

Diverse user group

management

Regulatory/

government

relationship

management

Product lifecycle

management

Global,

enterprise-wide

product launch

Production

ramp-Up

Pilot user selection

/ controlled roll-outs


13/23

Companies that are highly coherent in their strategy &

capa es cons s en y ou per orm e r peers

5-Year EBITDA as % of5-YearMarket CAPRevenueCAGR

74

Coherent Companies

Com anies whose ca abilit sets

PeerGroup

Average

52

and strategies are tightly alignedare coherent

They focuson the set ofcapabilities that drive performance

45

53

n e mar e p ace

They excel at executionof thosecapabilities

Their innovation strategy and

HighlyCoherent

Low to ModeratelyCoherent

HighlyCoherent

Low to ModeratelyCoherent

capa es are a gne wcorporate strategy


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Note: Industry-normalized scores reflect the average percentile against your peers

CompaniesCompaniesCompaniesCompanies


14/23

Capability: Organizing for innovation requires balancing multiple

-

Innovation Organization Dimensions

Products

Innovation is inherently a highlycross-functional, cross-organization activity

While a Booz study found that >50%

innovation organizations recently

structure in itselfis a poor

EngineeringFunctions

Operations

effectiveness



15/23

Decision rights & information flows are 2X more powerful in

What Matters Most to Strategy & Innovation Execution

54Information Flow

26

50Decision Rights

Motivators

25Structure


,neglecting the more powerful drivers of effectiveness decision rights & information flow


16/23

Capability: Proactively managing innovation project portfolios via

Innovation Effectiveness Curve

cons s en me r cs s cr ca

Returnon InnovationInvestment

ROI2Raised

Innovation

CurrentInnovation

Curve

The Innovation EffectivenessCurve is an indicator of a firmsinnovation capability and future

Innova- Project (k)

urve growth prospects

Area under the curve is the total

Return On Innovationon

Project(k)

The larger area under the curve,the greater the firms returns oninnovation investments

Investment inProject (k)

TailHealthy Innovation Projects


Total Innovation Investments


17/23

Best results come from launchingA LOTof ideas into pipeline; then

Funnel vs. Tunnel:

Screening at Ideation &

Termination Within the Pipeline

Target ZoneLow Value Model

tried & LARGE portionterminated60%

Ap

prove

jects 40%

50%

High Performance

Mid-Ran%o

fIdea

asPr

Low Output ModelTunnel, Not a Funnel

10%

20%

Lower

0%

0% 2% 4% 6% 8% 10% 12% 14% 16%


.Percentage of Total No. of Projects


18/23

Ca abilit : customer insi ht is foundation of innovation success

Combining Customer Insight with Innovation Effectiveness

MarketBack

Innovation

Customer Insi ht A roachNone / Passive Active / Aggressive

ProductFocused


Source: Booz & Co. Global Innovation 1000, 2006


19/23

Companies who deeply & directly engage end users have superior

Direct Customer Engagement vs. Indirect Customer Insight Approach Median Index Values of OI Growth, Total Shareholder Return and ROA

1.5

1.2

1.4

1.6

nValue

Companies that directly engage theircustomers had >3x higher OI growth,

1.0

0.7 0.7

0.6

0.8

1

Inde

xedMedia

,

0.30.4

0.2

0.4

IndustryI

DirectCustomer

Engagement

Indirect InsightApproach

DirectCustomer

Engagement


DirectCustomer

Engagement



3Y Operating Income CAGR 3Y Return on Assets

Note: Direct Engagement represents scores of 1 or 2; Indirect Insight represents scores of 3,4, 5

Source: Booz & Co. Analysis

3Y Total Shareholder Return


20/23

Capability: successful Open Innovation depends on systematic

Closed Innovation Factors Driving

Increasingly mobiletrained workers

Open Innovation

The

Boundary

of the Company

More capableuniversities

Increased availability of

MarketProjects

Open Innovation

low cost communicationchannels

Erosion of oligopolyCurrent

Boundaryof the Company New

Market

mar e pos ons

Enormous increase inVenture Capital funding

Market

esearc

Projects



21/23

Example: Apple created the iPod in just 6 months leveraging an

---

Carte blanche to hire artners & team

35 person team from Philips,IDEO, General Magic, Apple,Connectix and WebTV to

An entrepreneur with anidea comes to Apple

Steve Jobs takes personal interest iPod

develop the iPod

iPod critical success factors: Business system innovation Openness of development

process

PortalPlayer manages technicaldesign and earns annuity revenue

stream

Iterative collaborative relation-ship with PortalPlayer and otherpartners


mon s

Source: Booz & Co


22/23

Key Takeaways

While innovation spending level is not correlated with financial performance,weve determined strategy, talent & process do influence results

There are 3 distinct innovation strategies, all of which can be successful

Coherencebetween innovation strategies and priority capabilitiesis critical

A rigorous innovation funnelis superior to a tunnelportfolio model

key organizational enablers

Deep customer & end user understandingprovides real advantage

Open innovationcan create a continuous flow of ideas and technology



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