Innovation - There is no other option
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Innovation - There is no other option

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  • Arguably this is the most important slide of them all. Companies listed on the London Market. Differences between innovating and non-innovating companies are much more noticeable during periods of economic downturn (recession). Most companies can do at least reasonably well during economic good times. Reference: Geroski and Machin, Business Strategy Review, Summer 1992, pp 79-90
  • Stress is on “success”, eg growth of market share, greater profitability, better health care. “ New” can be completely novel, or well established in one sector of the economy but new to another. Innovation is very largely market/customer driven. Science, technology, etc are enablers or provide new opportunities. “ Research is the transformation of money into knowledge; innovation is the transformation of knowledge into money.” Value Added is the key economic outcome , irrespective of the nature or size of the business.
  • This is one diagrammatic way of characterising different levels or types of innovation. Note that innovation is as important in services as in products but is usually of a quite different nature in services. The demands on leadership, skills and technologies increase from Zone 1 to Zone 3.
  • The substance of these quotes is even more true today than when they were made. Note the strong emphasis on customers and attitude of mind (culture/behaviour). Also, innovation must be focused on goals but free of rigid processes. The point about “The best technology wins” begs the question: what is best? Depends on who is making the judgement, for what purpose, and against what criteria. For example Betamax and the Phillips formats were considered to be technically superior to VHS in the 1970s early 80s, and the Apple operating system is considered better than Microsoft, but………
  • The global economy places greater value on economies of speed, scope and skill rather than simply economies of scale. Breakthroughs most often occur when a variety of people with disparate interests and backgrounds focus on shared problems or processes. If innovation is messy, can it be “engineered” or captured in well defined processes?
  • Just some examples of the global changes and pressures which companies must address through innovation.
  • Business R&D investment growth around the world, by headquarters location. Growth in China, India and the rest of the world is almost four times that elsewhere.
  • This chart shows proportion of value added accounted for by what OECD define as knowledge intensive industries. This shows the economic importance of knowledge intensive services across all major OECD economies – in terms of size they exceed so called “high technology” manufacturing by a factor of 3:1. Innovation in services is therefore crucial but more traditional measures of innovation, such as R&D investment and patents, are much less relevant than adaptation and utilisation of technologies, new business processes, new ways of satisfying customers.
  • This is the key message from the report for directing policy. Globalisation and technological change mean more and more activity can be sourced elsewhere in the world, making UK firms more vulnerable over time to low labour cost competition. Means more firms will need to concentrate on moving up the value added chain by innovating in new products and services or in ways of doing things. And shorter times to market mean they need to keep innovating to keep up with, never mind stay ahead of the competition. Of course not all businesses will be affected in the same way or on the same timescale. Some activities can’t be sourced elsewhere in the world – they have to be delivered where the customer is. But even here, we shouldn’t forget the increasing scope to place parts of the production process or service provision around the world. Reference: DTI Innovation Report, Competing in the global economy: the innovation challenge, December 2003 But destinations for outsourcing are themselves moving up the value added chain (eg China and India). What does this mean for the longer term – the benefits of low labour costs are transient, strategic alliances are what matter?
  • Reference: DTI Innovation Report, Competing in the global economy: the innovation challenge, December 2003 But some UK business people have vehemently disagreed with some of this, saying they are highly innovative in competing internationally, and the Government does not understand what it takes to succeed these days!
  • Customers - Intelligent and demanding firms stimulate new and innovative products and services. Government and the public sector more generally therefore need to improve their own procurement performance. Public sector procurement of goods and services currently amounts to over £120 billion per annum. Regulatory environment - Firms react to the environment in which they operate: macroeconomic; competition; regulatory; intellectual property. Access to finance - Firms need money on acceptable terms to invest in generation, exploitation and commercialisation of new knowledge. Sources of new knowledge -Ideas and inspiration come from a wide range of sources. The UK science and engineering base is a key source of new knowledge – but not the only one. Firms also generate much new knowledge, and look globally. Networks and collaboration - Successful firms rarely have the knowledge or capacity to innovate alone. They use a variety of collaborative arrangements and other relationships. Increasingly these need to be global. This appears to be an area of relative weakness in the UK. Competition and Entrepreneurship – weak competition policies have placed UK firms under less pressure to use new technology and business processes, and thereby improve performance. Capacity to absorb and apply new knowledge - Essential to increasing high value-added activity and profitable growth. Hindered in UK by weaknesses in relevant management and other skills. Reference: DTI Innovation Report, Competing in the global economy: the innovation challenge, December 2003
  • This diagram attempts to show in a simplified way the main inputs to business activities and the resultant outcomes or outputs.
  • These are just some of the many ways in which Government policies can impact on business innovation. The impact can be positive or negative depending on how well Government and its agencies: do their job; understand what it takes to be a successful innovative business; understand the business implications of global trends; establish frameworks or goals for action, not prescription; and so on.
  • In addition to the sources above, these characteristics also reflect the findings of interviews with some 20 CEOs of leading innovative businesses.
  • “ Research is the transformation of money into knowledge; innovation is the transformation of knowledge into money.” R&D intensity (R&D/sales) is normally used for comparison (benchmarking) purposes because it normalises for country/company size and can be used to group business sectors by their propensity to invest in R&D (see below). Grouping of business sectors by R&D intensity (R&D/Sales%): Group 1. High intensity ( 5.0% or greater). Pharmaceuticals & biotechnology and health; some chemistry-based sectors. Group 2. High intensity (5.0% or greater). Electronics and IT which include electronics & electrical, IT hardware and software & computer services. Group 3. Medium intensity (2.5% to 4.9%). Engineering and chemicals. This group includes aerospace, automotive and chemicals. Group 4. L ow intensity (1.1% to 2.4%). Includes beverages, food producers and telecomms. Group 5. V ery low intensity (up to 1%). Includes construction, oil & gas, mining and utilities. Reference: The 2006 R&D Scoreboard, Commentary and Analysis – Part 1, DTI and Company Reporting Ltd, October 2006
  • Comparing total R&D investments or overall R&D intensities by country provide little insight into the reasons behind relative positions or appropriate policies for increasing R&D. Need to look at the business/sectoral breakdowns of national economies. For example, if a country has a high proportion of its economic activity (sales) in high intensity business sectors (eg pharmaceuticals) and a low proportion of activity in low intensity sectors (eg oil and gas), it will have a high overall R&D intensity compared with countries in which the opposite is the position. However, this does not necessarily mean that the low R&D intensity country is underperforming economically, eg as measured by value added.
  • Typical R&D intensities by business sector, irrespective of country, vary very substantially as shown in this slide.
  • This slide shows the marked differences between countries in business sector distribution of R&D investments. For example, the relative strength of Germany in automotive, Switzerland and the UK in pharmaceuticals, South Korea in electronics.
  • This slide, and the next (ES6b), show why there is such a large variation in overall R&D intensities between countries. For example, although the UK comes second to the US in R&D investment in pharmaceuticals and health, total UK sales are dominated by business sectors with relatively low R&D intensities, thus producing a low overall R&D intensity of 1.8%. In contrast, Germany has high R&D investments and sales in engineering (including automotive) and chemicals, thus producing a much higher overall R&D intensity of 4.1%.
  • It was noted earlier that R&D investment is only one element of innovation. Nonetheless, effective R&D investment is reflected in company performance. Equally, underinvestment compared to peers within the same business sector can lead to less competitive products and services and to poorer company performance. This slide shows that over the period 1997 to 2006 the high R&D intensity companies within the FTSE 100 out-performed the full FTSE 100 in terms of market cap growth.
  • This slide shows that company profitability is positively correlated with combined R&D and capital investment – one reminder that R&D alone is not sufficient.
  • Of the 1000 companies analysed, 94 outperformed all the rest in seven key performance measures: sales growth, gross margin, gross profit growth, operating margin, operating income growth, shareholder return and market capitalisation growth. For example, the average gross margin for the 94 companies was 20% better than the average for the other 906 companies. But these 94 companies also invested less on R&D as a percentage of sales (ie had lower R&D intensities) than their respective sector medians over the same five year period, again underlining that R&D alone is not sufficient.
  • In this case, Rest of the World includes China and India.
  • This is a small company with big ambitions, dynamic and foresighted. Holds its own against much bigger companies. Because of very low labour costs no need to chase low labour costs around the world. Makes high quality investment in equipment. Aim is for 25% growth per year from products developed in past three years. Seeks to create new markets and then dominate them through combination of factors: product and process innovation, customer focus, effective deployment of people, use of other resources including IT, and aggressive use of patents. Demonstrates that small companies can achieve excellence across the range of factors that make for international competitiveness. Reference: Manufacturing Excellence Awards, 2004.
  • Is this a robust universal business model, ie outsource manufacture/production? How prevalent is this attitude, does it generate more success (value added) than failure? Could the UK economy thrive with this model alone?
  • What was satisfactory yesterday is either no longer wanted or superseded by something better today.

Innovation - There is no other option Innovation - There is no other option Presentation Transcript

  • Innovation – there is no option Alistair Keddie WIMRC Seminar, 27 February 2007
  • Innovating Companies
    • Grow faster than non-innovators
    • Are much more profitable
    • Sustain higher performance
    • ( From an analysis of 500 listed companies by Geroski & Machin)
  • Definitions
    • Innovation – the successful exploitation of new ideas
      • new products, services and processes driven by customers and markets
      • enabled by science, technology, design and new business practices
      • creates wealth, improves wellbeing, uses resources more efficiently/productively
    • Value added
      • Wealth created by companies/organisations
      • Measured as sales less cost of bought-in materials, components and services
  • Levels of Innovation Zone 3 Transformational Innovation Zone 2 Relative Innovation Innovations that build on existing products/services Taking existing products to new markets eg Dyson cleaner Carphone Warehouse Supermarket on-line shopping New concept products or services, Breakthrough value propositions and business models eg mobile phone, I-Pod, Low cost airlines, Web-based banking Zone 1 Incremental Innovation Minor product or service enhancements eg the new LandRover Discovery Coke with lemon Improved customer care
  • Some quotes
    • The fundamental characteristic of a modern market is not price, but innovation…….technological superiority…the best technology wins, the second best loses
    • Innovation is as much an attitude of mind as a scientific or practical exercise (Sir Paul Girolami, Chairman, Glaxo, 1993)
    • Innovation is the key to growth because it delights our customers
    • We are managing in chaos, and this is the right way to manage innovation…..in reaching our goals
    • (William Coyne, Senior Vice President R&D, 3M, 1996 )
  • Some Quotes
    • Innovation drives profits and improves the human experience
    • Principles of successful innovation:
      • Hire the best and let them lead you, regardless of title or department
      • Create communities with partners, customers and business groups that allow collaboration and open innovation
      • Create small groups and give them autonomy – task forces, not steering committees
      • Allow public debate, but know when the debate should end and then move quickly to focus resources
      • Have the courage to make the hard decisions
    • Great companies and leaders pursue projects with dramatic potential
    • Innovation is a messy business
    • (Jonathan Schwartz, CEO and President, Sun Microsystems, 2006)
  • Global Pressures - Examples
    • Exports of manufactured goods from developing countries:
    • 2005: 25%  2025: 50%
    • Graduates produced per year:
    • 2 million in both China and India
    • Growth in R&D investment:
    • 15% per year in Singapore
    • Environmental issues:
            • Climate change
            • Waste minimisation
  • Global R&D Growth Rates, 2000 – 2005 (From Booz Allen Hamilton, 2006)
  • Value Added by Knowledge Based Services and Industries Finance, insurance, other business services, community, social and personal services G7 comparison, 2000 Per cent of total value added 0 10 20 30 40 50 Germany UK France Japan US Canada Italy Communication services High and medium-high technology Source: OECD
  • DTI Innovation Report: Economic Message
    • UK Businesses will only achieve long-term success in global markets by focusing on greater value added as their competitive edge.
    • Innovation is the key to achieving this.
    • Businesses need to keep innovating to stay ahead of the competition.
    • UK innovation performance accounts for significant part of productivity gap
    • Weaknesses in innovation and productivity performance affect all sectors
    • Need more innovation in business and a larger number of innovative businesses – more high value added activity
    • Government has significant role to play by influencing behaviour of business and other participants in the innovation system
    DTI Innovation Report: Key Conclusions
  • Capacity to absorb and adapt new knowledge Competition & entrepreneurs Networks & collaboration Regulatory environment Access to finance Sources of new knowledge Innovation Customers Suppliers Critical Success Factors
  • Business Innovation Inputs Outcomes Business
    • Knowledge:
    • Science
    • Technology
    • Business Practice
    Finance Infrastructure People - Customer demand - Profit - Risk/reward balance - Strategic vision - Management ability and ambition - Employee Motivation
    • New products/services
    • New processes
    • R&D
    • People
    • Culture
    • Organisation
    • Skills
    • Marketing
    • Relationships
    Influences Activities Value Added Productivity Economic Growth Employment Environmental Quality Health Public goods and services Knowledge
  • Public Policy Context for Business Innovation Business innovation
    • Building blocks of innovation: a supportive climate
    • Macroeconomic stability
    • Competition policy
    • Education, training and skills
    • Science and technology
    • Physical and IT infrastructure
    • Advice and Support:
    • Best practice
    • Programmes
    • Support for
    • Developing new
    • Technology
    • Help for accessing
    • Finance
    • R&D Tax Credits
    • Enablers:
    • Intellectual property framework
    • National Measurement System
    • Technical standards
    • Opportunities:
    • Public procurement
    • Regulations
  • Characteristics of Innovative Businesses
    • An innovation culture with corporate leadership that expects growth through development of new products and services.
    • A worldwide focus, often requiring early expansion overseas.
    • A balanced growth strategy, with a majority of organic growth and targeted acquisitions to enter new markets or acquire critical expertise.
    • A focus on what really matters to the customer.
    • Above average investment in market-led research and development.
    • Above average investment in physical and business processes
      • Sources: DTI analysis of company reports to compile Value Added and R&D Scoreboards, reporting on the performance of major UK and European companies. The analysis has identified successful companies that invest heavily in innovation.
  • Innovation and R&D
    • R&D is only one measure of innovation performance
    • R&D is a measure of technological innovation; it does not capture non-technological aspects
    • R&D accounts for about 40% of all investment in innovation
    • R&D intensity (R&D/Sales) is a key benchmark of company investment in R&D, especially in R&D intensive sectors
    • But a low R&D intensity does not necessarily mean a firm/sector does not innovate, or does not generate substantial value added
  • R&D Performance of UK Based Firms
    • Within any sector UK based firms have similar R&D intensities to their competitors in the same sector
    • But the UK has relatively few large firms and low economic activity in some high R&D intensive sectors
    • Hence overall UK business R&D investment is below that of major competitors – in terms of R&D intensity (R&D/Sales), 1.8% for the UK compared with 2.6% for France, 3.80% for Japan and over 4.0% for Germany and the USA
  • Challenge: More Business R&D in the UK
    • Government wants to see total UK R&D (business and public) increase in real terms from £22.5 billion per year (1.9% of GDP) to £39 billion (2.5%) between 2004 and 2014
    • Business share of this would increase by £12 billion per year, from £14.5 billion to £26.5 billion
    • How realistic is the ambition?
    • What are the options for achieving it?
    • Is there a better alternative to simply focusing on R&D ?
  • Grouping of Sectors by R&D Intensity
    • Group 1. High intensity ( 5.0% or greater). Pharmaceuticals & biotechnology and health; some chemistry-based sectors.
    • Group 2. High intensity (5.0% or greater). Electronics and IT which include electronics & electrical, IT hardware and software & computer services.
    • Group 3. Medium intensity (2.5% to 4.9%). Engineering and chemicals. This group includes aerospace, automotive and chemicals.
    • Group 4. L ow intensity (1.1% to 2.4%). Includes beverages, food producers and telecomms.
    • Group 5. V ery low intensity (up to 1%). Includes construction, oil & gas, mining and utilities.
  •  
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  • Performance of High-Leverage Innovators (From Booz Allen Hamilton, 2006)
  • High–Leverage Innovators: Geographical Distribution (From Booz Allen Hamilton, 2006)
  • Examples of High-Leverage Innovators (From Booz Allen Hamilton, 2006)
    • North America
    • Apple Computer, Black & Decker, Caterpillar, Dell, Exxon Mobile, Google, Kellog, Par Pharmaceutical, Research in Motion, SanDisk, St Jude Medicical, Symantec, Yahoo
    • Europe
    • Adidas, Cadbury Schweppes, Christian Dior, Volvo
    • Japan
    • Casio Computer, Kobe Steel, Komatsu, Konica Minolta, Toyota Motor
    • Rest of World
    • AU Optronics, Hen Hai Precision Industry, Hyundai Motor, Mediatek, Petrobas, Samsung Electronics, Tata Motors, Teva Pharmaceutical Industries
  • Case Study: Grippel, Sheffield
    • Product: spring loaded wire tensor
    • Markets: agriculture, electrical and lighting
    • Performance:
      • 30% growth per annum
      • 90% exports
      • 6.7% of revenues re-invested
      • 27 stock turns per year
      • 24 hour delivery
      • 1.2% labour costs, reduced from 40% in 1989
    • People
      • 146 employees, 86% are shareholders
      • All involved in continuous product and process improvement
      • 7% of time on training
      • Fun place to work
  • Another Quote
    • “ We don’t want to manufacture because you end up running the plant rather than running the business”
    • (Tony Moloney, Co-founder, Anthony Allan Foods/WeightWatchers, 2007)
  • A final quote
    • “ He that will not apply new remedies must expect new evils; for time is the great innovator”
    • (Francis Bacon, Essay on Innovation, 1625)
  • Some Questions
    • Can successful innovation be managed?
    • Does the best technology always win?
    • Is the Government objective of increasing UK R&D investment from 1.9% to 2.5% of GDP by 2014 realistic?
    • Do the most successful business models exclude manufacturing?
    • How long can the low wage advantage of emerging economies last?
  • References
    • Geroski and Machin, Business Strategy Review, Summer 1992, pp 79-90
    • DTI Innovation Report, Competing in the global economy: the innovation challenge, December 2003
    • DTI Economics Paper No 11, R&D Intensive Businesses in the UK, March 2005
    • The 2006 R&D Scoreboard, Commentary and Analysis – Part 1, DTI and Company Reporting Ltd, October 2006
    • The 2006 Value Added Scoreboard, Commentary and Analysis – Part 1, DTI and Company Reporting Ltd, July 2005
    • The Global Innovation 1000, Booz Allen Hamilton, Special Report, 2006
    • Manufacturing Excellence Awards, 2004
  •