Judge Business SchoolBuilding a Smarter Enterprise:Leading Change, Embracing Disruption

IBM CIO Leadership Exchange

Shanghai, 12th February 2009

Professor Peter Williamson

We Need to Move Beyond “Cost Cutting” To “Cost Innovation”

As the recession bites, most of us are coming under pressure for the usual “across the board” cost cuts

But wheeling out yesterday’s strategies won’t be enough• A third of top-quartile companies stumbled in the last recession• Only 10% had clawed their way back 5 years later • 15% of today’s market leaders used the recession to vault to the top

We need smarter ways to embrace disruption

Part of the answer is “Cost Innovation”:

“Focusing innovation on delivering a step-changein value-for-money”

The Three Faces of Cost Innovation

Challenging existing business models:

Technology for the MainstreamZhongxing Medical (X-Ray)

Digital Direct X-ray Equipment (DDX)

• Global market dominated by GE and Philipswho use DDX for high-end applications (egheart scans)

• Foreign machines cost $400,000

•Zhongxing obtained the base technology fromits parent: Beijing Aerospace

• Decided to apply the DDX technology toevery-day applications like chest X-rays

By re-engineering the technology and ancillary equipment, Zhongxing’smachine cost just $20,000 to build• Plug compatible with hospitals’ existing IT systems• Functionality optimised for mainstream applications• Compared to $150,000 for GE and Philips models

Zhongxing took 50% of Chinese market• Philips withdrew from segment• GE cut prices by 50%

Zhongxing now aggressively expanding into overseas markets,already largest in Asia

Technology for the Mainstream:Zhongxing Medical (Continued)

Variety and Customisationat Low Cost: ZPMC

Started by assembly (Initially half of the components were imported)

Re-engineered the design process and hired 800 design engineers

Launched a wider and more customised product line than any global competitor• GPS system for RTG auto-steering and container management,

failure displaying and monitoring system, intelligent spreader, automatic positioning system and anti-collision systems

52% of the world market in harbour cranes!

Cost Innovation Also Allows More New Models, More Often

“In developed countries, you will need at least US$20 million to complete a whole auto design project. But here [in China] you can do it for US$2.4 to US$3.6 million”

“Our company alone can also complete a total of 20 projects per year on whole autos as well as modified vehicles”

Lei Yucheng,President of TJ Innova

Exploding Niches: Haier’s Wine Coolers vs Niche CompetitorsLa Sommelière

$1,600Haier$704

Haier has 60% of US Market (by value)!

Cost Innovation Capabilities Are Becoming More Important Globally

The capabilities to thrive in supplying emerging markets• By 2005 the GDP of emerging economies moved above 50%

of total world GDP measured at PPP

The emergence of large “value for money” segments in the USA, Europe and Japan• Real incomes of significant sectors of the population have

stagnated or declined with shifts in global labour markets

The increasing concentration of global retailing• Eg Wal-Mart, Tesco, Carrefour

A more volatile global market• Demanding greater agility and flexibility

The Next CIO Agenda in a“Value-for-Money” World:

Business cases for IT investment based onCost Innovation

Enabling global innovation:Learning from emerging markets

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Business Cases for IT Investment Based on Cost Innovation

IT investments that enable high technology product and services to be rolled out to the mass market quickly

• Eg automated distribution, set-up, support, maintenance, etc• Making it possible to deliver high technology to the mainstream

IT investments that reduce the cost of variety and customisation• Eg efficiently capturing and communicating customer

specifications

Business Cases for IT Investment Based on Cost Innovation

IT investments that increase supply chain flexibility• Eg reduced set-up costs and lead times

IT investments that reduce the breakeven for today’s niche products• Eg better sharing of fixed costs

Enabling Global Innovation(And Learning From Emerging Markets)

Local Global

Supp

ly c

hain

Local

Global

Innovation Process

MyopicNational

GlobalLearner

NationalLearner

GlobalProjector

In Sum, a Change in Leadership Mindset:From the Past: To the Future:• Quality versus cost Value for money

• High technology High technology rapidlythe high end applied to mass markets

• Variety and customisation Variety and customisation at a hefty price premium at low incremental cost

• Perpetual niche markets Exploding niche markets

• Transferring knowledge Learning from emergingto emerging markets markets as well