innovating for growth: innovation 2.0 - a spiral approach to business model innovation

Innovating for growth

Innovation 2.0: a spiral approach to business model innovation

November 2012


Contents

► Introduction

► Explanation of framework

► Key findings

► Beyond Innovation 2.0 — Recommendations for successful

business innovation


Innovating for growth — Innovation 2.0: a spiral approach to business model innovation

Innovation is the successful development of an idea that generates business value for sustainable growth.

Innovation is not a strategy; it’s a way of being.


Introduction


Setting the scene

► Innovation 2.0

► What approach are leading innovators taking.

► Launched in September 2012.

► Based on interviews with 45 participants, which included Ernst & Young

professionals and academic and business leaders representing a range of

industries in Europe, the US, Africa, Brazil, China, India and Russia.

► Since launching Innovation 2.0, we have continued our Innovating for growth journey:

► Quantitative survey of 516 senior executives from multinational companies in both

mature and rapid growth markets.

► A two-month social media conversation on LinkedIn and Twitter.

► Beyond Innovation 2.0

► Offers recommendations for guiding your company through the framework to

achieve successful business innovation.

► Launched in December 2012.

► Based on 2.0, quantitative research and insights from social media conversation.


Can your company pass the 90-day test?

► SAP Labs India slashed the time to get SAP products

to customers from 6 to 12 months to 90 days.

► The initiative was led by VR Ferose and allowed

the company to gain competitive advantage.

► To achieve this, SAP:

► Used much smaller teams

► Used “champions” to promote the new approach

throughout the company

VR Ferose Managing Director and

Senior Vice President

SAP Labs India


The innovation spiral

► Innovation has evolved from a linear step-by-step process to a much

more spiral, iterative approach.

► Companies don't need an organized innovation plan to succeed.

► By adopting this approach, the most innovative companies are able to:

► Take advantage of changes in the external environment

► Continually revamp their business models to achieve competitive advantage

► Innovate to obtain specific business outcomes, such as increased agility or

stakeholder confidence

► The framework that we have developed as part of this research shows

how the process works.


The framework


A new approach to innovation

Capitaliz

e Achie

ve

Innovation process

Areas of innovation

External collaboration

Innovation enablers

Innovation spiral

External environment

► Technological advance

► Regulatory uncertainty

► Macroeconomic trends

► Ecological concerns

► Demographic shifts

Business outcomes

► Profitable growth

► Customer engagement

► Business sustainability

► Productivity

► Business agility


The external environment Capitalize on the opportunities

► Identifies the major market and economic circumstances that

affect business.

► These elements increase global exposure to risk, but they also

offer major opportunities that can transform whole industries.

► Innovative companies know how to capitalize on the external

environment to turn even adverse conditions to their advantage.







A


1. Areas of innovation

► Organizations typically innovate in three areas: products

and services, processes, and business model.

► Business model innovation tends to confer more lasting

benefits.

2. Innovation process

► This is the shift from a linear, step-by-step process

to a spiral, iterative approach enriched by intuition

and socialization.

► Intuition is the process of obtaining ideas, from anywhere

and everywhere.

► Socialization happens when the idea is discussed and

debated with other people, formally and informally.

3. External collaboration ► The most innovative organizations realize that they cannot

produce everything on their own. To be truly competitive

they need to access different skill sets and expertise by

collaborating with others.

4. Innovation enablers ► These are the internal factors necessary for the innovation

spiral to work.

B The innovation spiral Achieve competitive advantage by innovating

Innovation spiral


► The business outcomes show that companies innovate to

achieve five key business outcomes.

► The challenge is to focus on all of these outcomes together,

rather than favoring one over another, which compromises

the ability to anticipate change and drive growth.

Business outcomes




► Productivity


Business outcomes C


Key findings


What companies should be doing to achieve sustainable competitive advantages

A. Take advantage of changes in the external environment

B. Continually revamp their business models to achieve

competitive advantage

C. Innovate to obtain specific business outcomes,

such as increased agility or productivity


Capitaliz

e Achie

ve

Innovation spiral







Business outcomes




► Productivity


Are you taking advantage of changes in the external environment? A


Turn challenging situations to your advantage

► The most innovative firms turn challenging situations to their advantage.

► In most rapid-growth markets, innovation tends to be the solution to a

fundamental problem.

► Consequently, companies can innovate themselves into a completely

new industry.

Case study: Suzlon Energy, India

► A wind turbine supplier based in India was born out of a

textile manufacturer.

► An unreliable and expensive power supply led the chairman to

experiment with wind power to maintain factory productivity.

► The resulting wind turbines are helping solve power supply

problems across India and are meeting global needs, making

Suzlon the world’s fifth-largest supplier of wind turbines.

John O'Halloran President of Technology

Suzlon Energy Ltd.


Internet and cloud services alter competitive landscape

► The internet and cloud services have radically changed the notion of size as

an indicator of commercial potential:

► Smaller companies can now use cloud computing and compete with multinationals

without having to invest in the technological infrastructure.

► The services open up cross-border opportunities and allow companies to access

new consumer bases without having a physical presence there.

► Companies of all sizes and from different markets can compete with

traditional multinationals due to a surge in intangible assets (e.g., IP).


Where other companies have taken advantage of the external environment

John Waibochi CEO

Virtual City

Be adaptable. When Virtual City, a systems integration and mobile solutions company

based in Kenya, tried to replicate Amazon and eBay in Africa, it had limited success.

But thanks to its experience in containing air-freight costs, the company discovered

new supply-chain strengths.

“We changed our entire company from being an internet service provider to a supply-chain

automation company,” says John Waibochi, CEO of Virtual City. “This is now our business,

thanks to a broad perspective, which enabled us to understand where our true strengths lie

in relation to opportunities in the market.”

Seize converging opportunities. US-based Boston-Power, a leader in energy storage,

capitalized on ecological concerns, regulatory incentives and customer potential in China to

become a major energy supplier to the automotive industry. Whereas gasoline-powered cars

could only be bought by lottery and driven half the week in China, electric cars could be

purchased and driven freely.

“Being an entrepreneur, a nation seeking to be less reliant on oil meant significant

opportunity for me,” says Christina Lampe-Onnerud, Founder and International Chairman

of Boston-Power. “Our insight suggested that China’s policymakers had stimulated the

customer base to enable a market in electric cars. In a sense, the government became

a procuring body. An electric car is now a status symbol among high officials because

it plays to the green agenda and involves state-of-the art technology.”

Dr. Christina

Lampe-Onnerud Founder and

International Chairman

Boston-Power, Inc.


Where other companies have taken advantage of the external environment

Turn regulation to your advantage. Government policies can help drive cross-border

opportunities. “In North America, government incentives helped facilitate fantastic growth in

the market for wind turbines,” says John O’Halloran, President of Technology at India-based

Suzlon Energy.

A US telecom company follows a similar strategy in China. “Government subsidies are aligned

to the Five-Year Plan, so we maximize use of the cloud in education because this was a key

element of the technology initiatives in the Plan,” says the company’s managing director for

Greater China.

Look for a “universal” customer base. E-commerce has opened up a wide range of online

customers who are unrestricted by geography. For Alibaba Group, electronic business

brought about a free flow of information that allowed companies and individuals to cooperate

with and support one another.

Dr. Brian Junling Li Vice President, CEO Office

Alibaba Group

John O'Halloran President of Technology

Suzlon Energy Ltd.


Capitaliz

e Achie

ve

Innovation spiral







Business outcomes




► Productivity


Can you revamp your business model regularly to achieve competitive advantage? B


Innovations to the business model can lead to more lasting benefits

► Companies that alter their business model are more likely to achieve a

sustainable competitive advantage.

► It is much more difficult for a competitor to copy a business model than it is

to replicate products or services.

► Today’s most innovative companies have changed their business models

from a set focus on geographies, local markets and products to a dynamic

focus on customer experiences, value generation and problem-solving.

► In a global economy, the major block on progress is protectionism:

the disrupter for this is collaboration.

► Innovation leaders further economic progress by collaborating with a

broader group of peers, including consumers, suppliers and competitors,

leading to further innovation in business models.


How do these models work in the real world?

Zytek Automotive Supporting “managed” innovation

► The ownership structure favors innovation that achieves a balance between the

investment needed for it and profitability.

► Zytek is owned by a company that is used to quarterly reporting and monthly

performance figures.

► This means that they don’t do innovation for innovation’s sake. Innovation has to have

a tangible benefit to the firm — often in financial terms.

► The revenue achieved through innovation is often used for further investment in R&D.


► Boston-Power’s business model is based not on

traditional contract manufacturing agreements but on

business partnerships with shared risk and reward.

► Instead of investing in and building their own factory,

they accessed spare capacity on manufacturing lines

and paid a contract manufacturing fee per battery.

► To ensure they maintained the quality of the batteries,

they included some of their management team to

co-lead the factory.

► This allowed them to enter the capital-intensive industry

through scalable manufacturing.

Dr. Christina Lampe-

Onnerud Founder and

International Chairman

Boston-Power, Inc.

1 Sharing risk and reward


► A growing trend is for companies in the same industry to unite to

create a shift in consumer habits or spearhead the development

of a common technology platform.

► This involves careful management of intangible assets, with

companies making rigorous decisions on their IP, collaborating in

areas where there are complementary capabilities or offerings,

and protecting strategic intellectual property.

2 Collaborating with competitors


► ARM Holdings was formed 22 years ago in the UK as a spin-off

from two competing technology companies for whom

collaboration was not possible.

► ARM was created to exploit the low-power chip design for

handheld computers, based on a licensing and royalty model

for the two companies involved. The revenue from this model

has supported the further development of ARM’s own

microprocessors, which now have a 95% market share in

mobile phones.

Bill Parsons Executive Vice President

of Human Resources

ARM

3 Creating an independent licensing and royalty model


► The right leadership mindset is one of the key enablers of strategic innovation.

► It is directly linked to an organizational culture that nurtures, guides and supports

innovative thinking and practices.

► Essential elements of this kind of culture include:

► Leadership support

► Collaboration through social networks

► Cultural diversity

► Mobility

► Leading-edge key performance indicators (KPIs)

4 Building the right mindset and culture


Capitaliz

e Achie

ve

Innovation spiral







Business outcomes




► Productivity


Are you innovating to achieve specific business outcomes? C


► Innovative companies are focusing on competitive advantage to achieve

five key business outcomes:

1. Profitable growth

2. Customer engagement

3. Business sustainability

4. Productivity

5. Business agility

► The optimal situation is to achieve all of these outcomes together.

► While the business outcomes in our framework are closely connected to

each other, our participants offered valuable perspectives on each one.

Innovative companies focus on five key business outcomes


► Innovation can help firms to grow profitably by helping to expand

the business while maintaining high profit margins.

► However, innovation has to pay its own way, or it may have a

negative impact on the profitability of the company. This means that

the financial viability of innovation must be assessed.

► Traditional methods of assessing this are not geared toward

innovation and can sometimes be seen as one of the largest

barriers to innovation. The amount spent on innovation also

needs to be transparent to attract investment.

► Organizations need to have different KPIs to track innovation to

help them understand the different elements of risk and reward

and how they relate to investment levels and financial viability.

Profitable growth 1


► Understanding the customer is the top priority in

strategic innovation.

► Social media is a very useful tool in getting closer to the

customer because it enables companies to:

► Open up a dialogue with the consumer and achieve a deeper level

of engagement

► Build customer feedback and data into R&D

► Allow customers to drive their expansion

► The customer relationship is not just about selling the good

or service that they want but is now a much more holistic

experience. To achieve competitive advantage, companies

need to own the whole customer experience.

Customer engagement 2


► Innovation is the key to ensuring relevance now and in the future.

► It is not enough to come up with one great idea and then stop

innovating; you will quickly become irrelevant.

► E.g., Kodak was very successful with camera film but never made

the move to digital and is now irrelevant.

► Companies have to continuously go against the status quo, come up

with new goods or services, do things in new ways or even totally

revamp their business models.

► This is more the case now because we live in a connected world, there

is continuous volatility, and companies need to keep innovating to

achieve sustainable competitive advantage.

Business sustainability 3


► An increase in productivity can relay large competitive advantage.

► To achieve competitive advantage, companies need to improve their

internal processes to deliver products or services with fewer inputs.

► This can happen by using lean manufacturing and smaller teams or

by maximizing the benefits of technology.

► Technology can be used to make better use of data, improve

communication, and enhance speed and flexibility.

► For there to be innovation in productivity, people have to go against

the status quo of the company and try to do things in new, more

efficient ways.

Productivity 4


► Business models are designed to support leaner, more

agile companies.

► This is so they can quickly seize an opportunity or react to

a competitor.

► One of the main reasons this can now happen is due to

external collaborations.

► They can access skills, talent and IP from their partners, which

they couldn’t do before.

► This enables organizations to respond more quickly to

changing opportunities, with financial capital, talent and

operational flexibility built into their business model.

Business agility 5


Beyond Innovation 2.0— recommendations for successful business innovation

Capitalizing on changes in the external environment

and effectively navigating the innovation spiral,

increases a companies ability to achieve these five

business outcomes from innovation.

.


The most innovative companies systematically track technological advances,

regulatory uncertainty, macroeconomic trends, ecological concerns and demographic

shifts for unexploited opportunities.

• Seize opportunities in the changing environment by developing a process and strategy

for identifying and building opportunities.

• Evaluate technological advances which changed the playing field for companies of all

sizes, opening up new markets and creating new partnership opportunities as well as

new competition.

• Turn regulation to your advantage, implement a robust risk management program

which allows you to monitor and take advantage of regulatory changes.

• Be adaptable - analyze your business model to ensure it is flexible and includes an

effective change management program, allowing you to respond and succeed during

uncertain times.

Recommendations for capitalizing on changes in the external environment


Successful innovators innovate the entire business model, as well as goods and

services or process to achieve competitive advantage.

They understand the innovation process is not linear, are open to less traditional

external collaboration opportunities and understand the enablers for the spiral to work.

• Build a mindset and culture which encourages new ways of thinking, increased

socialization and teaming across functions.

• Set the tone from the top, build innovation as a competency across the

entire organization.

• Promote innovation through a rewards and recognition program, while

being careful not to overlook the educational value in any failed ideas.

• Support managed innovation, balancing between the investment required and the

benefits from it.

• Collaborate with a broader set of partners- which may include less traditional groups,

enabling fresh thinking and experimenting with new concepts

Recommendations for navigating the innovation spiral


Key findings from our quantitative research

► 78% of our survey respondents agreed that innovation now makes it possible for

companies of every size and in any geography to compete.

► Only 15% of survey participants feel that business model innovations contribute “very

much” to meeting company objectives compared to 19% of new processes and 37% of

products and services.

► Our survey participants believe that leadership (92%), culture (87%) and people (81%)

are most important in enabling innovation.

► Only 44% of survey respondents have regular formal innovation meetings with teams

outside their function or division, 29% have meetings with teams at other company

locations, and 22%, sponsor regular company social events, such as visits to art

galleries or sports matches to encourage employees to talk about innovation ideas.

► Nearly a quarter (23%) of respondents said their companies offer no particular

incentives for innovation. Of those that do, 54% can expect mention in a publication or

online, 35% have the promise of a promotion, 34% offer cash, and 28% offer vouchers

for food or sport tickets.


Summary

► Innovation has evolved from a linear step-by-step process to a much more spiral,

iterative approach.

► By adopting this approach, the most innovative companies are able to:


► Continually revamp their business models to achieve competitive advantage

► Innovate to obtain specific business outcomes, such as increased agility or stakeholder

confidence

► What companies should be doing to achieve sustainable competitive advantages:


► Continually revamp their business models to achieve

competitive advantage

► Innovate to obtain specific business outcomes,

such as increased agility or productivity

► Innovation is not a strategy; it’s a way of being.

Growing Beyond

Global growth is the business issue of today.

In Growing Beyond, we’re exploring how

companies can grow faster — by expanding

into new markets, finding new ways to

innovate and taking new approaches to

talent. It’s an ongoing program to help you

grow beyond your expectations. Join the

discussion at www.ey.com/growingbeyond.

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