Mastering the Dynamics of Innovation

Mastering the Dynamics of Innovation A Capgemini Consulting Point of View October 2008

Innhold

Capgemini Consulting

Innovation introduction

Norwegian CEO’ s on Innovation

Learning from leading software and online players

A new Innovation approach emerges

Getting innovation right

Innovation can be understood both as a process and an outcome, which embodies ideas, conversion of ideas and diffusion that creates an economic impact CREATIVITY AND ADOPTION The mental phenomena skills, cognitive ability, structures, culture and/or tools capable of originating (and subsequently developing) new ideas, innovation, inspiration or insight” Innovation is the process from idea, through development, to received benefits: We do not classify an invention as an innovation until it has been developed and implemented to an extent where it has an economic impact in an organisation and/or society. Idea generation Conversion Diffusion INVENTION “ Converting ideas into something new and specific with value creating potential” IMPLEMENTATION The process of transforming an invention into products or activities in order to successfully create impact of the invention”

Innovation moves far beyond the traditional product view and differs strongly in type across four distinct groups Delivery Financial Process Offering Core processes Business model Networking Enabling processes Product performance Product system Service Channel Brand Customer Experience Case Case Case Case Case Case Case Case Case Case Innovation breakthroughs often include several innovation types across these four groups.

Ideas and innovations can further be categorised according to the type of impact that the innovation may have Companies that want to lead their industry should aim to produce paradigm-shifting innovative ideas as these provide the greatest source of potential revenues. Source: PLM and Innovation – A Strategic imperative or an oxymoron", Collaborative Vision 2004 Categorising innovation into four categories “ Category Killer” Innovation

Helps a company capitalise on their existing offerings and to consolidate their current market position

Typically products, services or processes that differentiate to maintain or extend brand leadership within a category

Paradigm-shifting Innovation

Innovation with so strong impact that it changes the market place

Paradigm shifting innovations creates completely new market opportunities and shapes consumer demand

Introducing a new concept to the market which is not too complex but enough to entice the consumer

Linear Innovation

Innovation with the intention of maintaining market pace related to competitors and the competitors offerings

An example could be Colgate doing incremental changes on their products

Customer-driven Innovation

Innovations that responds to customer needs

Innovations focus on recombining, modifying, or tailoring of products and services based on customer demands

Leading companies generate more ideas in the paradigm-shifting quadrant than their followers Leaders also have clear processes in place to enable decision making and agreement around which ideas to take forward to the experiment phase of the innovation process. Source: PLM and Innovation – A Strategic imperative or an oxymoron", Collaborative Vision 2004 (b) Huston, L. & Sakkab, N “Connect and develop: Inside Procter & Gamble’s new model for innovation”, Harvard Business Review, 01/03/2006 The differences between leaders and challengers in idea categorisation LEADERS “ Category Killer” Innovation Paradigm-shifting Innovation Linear Innovation Customer-driven Innovation “ Category Killer” Innovation Paradigm-shifting Innovation Linear Innovation Customer-driven Innovation The mix of idea types

Leaders have a more even mix of idea types than Challengers

More of the ideas from Challengers about their products, services or processes can be categorised as linear innovation because they are fast followers

The number of raw ideas needed to lead to one success in customer driven, category-killer and paradigm-shifting categories varies by industry

As an example, P&G averages at least 100 (external) raw ideas in order to develop an innovative product

Leading innovators generate twice the number of raw ideas, up to three times the number of new products, services or processes (generally products) and enjoy a success rate that is twice as high as Challengers

The ideas put forward for invention are the most commercially attractive

The ideas are selected based on multiple criteria such as cost, manufacturability, market maturity etc.

Leaders achieve agreement on idea selection in the form of explicit (documented) buy in from all departments

Key : ● = idea; Note: numbers of ideas are indicative only CHALLENGER

While product innovation receive the majority of investments, business model innovation which has the lowest investment levels offer superior returns Return on Innovation Source: Calculation based on Prof. Larry Keeley (Doblin Analysis), The Taming of the New, Harvard Business School Press 2004 Companies destroy business value by generally focussing too much on product innovation compared to other innovation types !

According to Keeley the average global innovation success rate is 4%

Product innovation is by far the largest area of investments, but offer overall very limited returns

Business Model innovation is the smallest area of investments, but offer superior returns

Customer focussed innovation in channels, brand and experience offer moderate returns

Financial Process Offering Delivery Investment levels and returns last 10 years

Innhold

While other Nordic countries are considered as innovation leaders, Norway is heading towards the rock bottom of the Innovation Scorecard European Innovation Scoreboard 2007 Despite the low Norwegian innovation score at an European level, only 4% of interviewed CEO’s perceive their company to be lagging behind among their peers. Source: The European Innovation Scoreboard 2007; Capgemini Consulting CEO Study 2007

The European Innovation Scorecoard is a comparative analysis of innovation performance among EU

Summary Innovation Index is measured on input and output factors, for example Population with tertiary education pr 100 population (input) and European and US patents per million population (output)

The secondary axis of the Innovation Scoreboard is the average growth rate of the Summary Innovation Index on the primary axis

The countries plotted have been grouped by those that are ‘leading’, those that are ‘average’, those that are ‘catching-up’ and those that are ‘trailing’

Scorecard definitions

Norwegian CEO’s recognise severe challenges in pursuing innovation types producing high returns Level of investments Level of returns Low Moderate High Low Moderate High Product performance Product system Delivery channel Brand Customer Experience Business Model Business Network Core Process Enabling Process Source: Doblin analysis; Keeley Innovation type and returns Perceived improvement need Perceived innovation performance Low Moderate High Low Moderate High Product performance Product system Brand Customer Experience Business Model Business Network Core Process Enabling Process Source: Capgemin CEO study 2007 Norwegian CEO’s view on innovation Despite a poor Norwegian position on the EU Innovation Scoreboard, Norwegian CEO’s are confident about their basic innovation capabilities in bringing product innovations to the market!

Norwegian companies have challenges across the innovation value chain Idea generation Funding – (Conversion -selection) Measurement – (Diffusion - impact)

Revenue, sales and EBIT are most widely used by the participants to measure successful innovation, but the respondents are not particularly satisfied with the KPI

KTI is not widely used as a measure, but among the users, this KPI has the highest satisfaction rate

40% of the respondents find it very hard to measure successful innovation

Norwegian CEO’s highlight a strong presence of new ideas within Norwegian companies

However, as much as 48% of the interviewed CEO’s admit there is a lack of a structured process to capture new ideas

39% of interviewed CEO’s claim to have implemented some sort of ‘idea management system’

48% of the participants cannot quantify their investments in innovation

68% of the participants fund their innovation within the operations, while only 9% are dedicated project budgets and 5% are activated on the balance sheet

Source: Capgemini Consulting CEO Study 2007 Idea management in place Innovation spending

Innhold

Internet and software players are now recognised as some of the most innovative companies in the world Ranking of Select Companies by Various Innovation Surveys, 2007 BusinessWeek The World Most Innovative Companies , 2007 Top 5 Companies on Future Think Innovation Tracker, 2007 Fortune Top 5 Companies Most Admired For Innovation, 2007 2 2 5 24 35 38 4 2 5 2 3 4 5 1 1 1 Source: Capgemini C4 Lab analysis. BusinessWeek, Fortune, Future Think Innovation Tracker. Online Players Telcos Others

Leading Internet and software players have adopted radical innovation methods across the value chain Early Adopters of New Approaches to Innovation In-House Cross-Pollination External Spread Development Selection Idea generation Conversion Diffusion Source: Capgemini C4 Lab analysis. Harvard Business Review, “The Innovation Value Chain”, 2007 20% time Multi-functional teams Hack Days and Code contests Idea submission to top executives Web 2.0 Tools Open APIs and platforms Consumer-led innovation Leverage data from betas Prototypes and beta releases VC funding for employee ideas Initiatives External ideas - Open Innovation Leverage Open Source and Mashups Balanced exploration Leverage customer data from betas Mashup applications Tapping into open developer communities Brainstorming Sessions Distribute development kit broadly Alliances, co-opetition and common standards Social networks

Google pursue a balanced portfolio to ensure development of core while exploring a broader range of promising opportunities Core Related Inside company Outside company Location of opportunity Scope of opportunity Non-core Core Search, page rank Ads Gmail Related to core News, Product search, Earth, Maps Exploratory Wifi Android Froogle Picasa Orkut 70% 20% 10% Portfolio Management at Google

Location of opportunity

Inside company – Foster internal creativity

Outside company – Pursue major acquisitions to get access to customers or minor acquisitions to get access to talented people or new technologies

Scope of opportunity

Opportunities within current core activities

Opportunities related to current core activities

Exploratory opportunities outside core

Google follow a “70-20-10” strategy to ensure sufficient focus on the core capabilities related to search

70% of initiatives are within the current core, 20% are related to the core and 10% are exploratory

Before the prevailing portfolio strategy, the company experienced a tendency of being to exploratory and loose focus on its core

The “70-20-10” strategy decides the allocation of investments, talent and management time

Successful Applications can be moved towards the core

Gmail started as a exploratory initiative on “20%” time and is now located within the core

Despite substantial freedom to pursue own ideas within Google, project prioritisation is based on rigorous data support and the executive team having an analytical fact-based decision process.

With the introduction of iPod, Apple set a new standard for openness and speed Entrepreneur with an idea comes to Apple Independent contractor Tony Fadell develop iPod/iTunes product solution in 8 weeks Steve Jobs engage in the assignment and hire Tony to lead iPod development Apple/Fadell partner with Philips, IDEO, General Magic, Connectix,WebTV Apple develop iPod User Interface PortalPlayer in charge of iPod technical design PortalPlayer partner with Wolfson, Toshiba and TI to design iPod The creation of iPod in 6 months !! Creation of iPod in 6 months

Open innovation

External sourcing of idea

Extensive partner development

Revenue sharing with partner (Portalplayer get 15$ pr iPod sold)

Fast decisions

Strong executive commitment

Carte blanche to hire partners& team

6 months from idea to breakthrough innovation

Platform innovation

New business model (selling songs for a “buck” online)

Integration of MP3 player and online solution to create customer lock-in

Key Characteristics of the iPod process The introduction of iPod represented innovation across most of the innovation types discussed !

Innhold

Innovation success today requires a marked departure from traditional principles Idea generation New Approach The Innovation Value Chain Conversion In-House Cross-Pollination External Selection Spread Development Diffusion Traditional Prime Source of Ideas is the R&D Department Limited, through formal Channels Partner to Create Proprietary IPR Financing Dependant on Organisation Priorities Linear process Disjoint Ownership Across Teams Limited to market segments or delivery platforms Ideas can Emerge Anywhere in the Organization Provide individual freedom to pursue own ideas Collaboration across diciplines Adequate, through Web 2.0 tools Establish incentives for collaboration Open Innovation - source ideas externally Collaborate to Evolve Common Standards Financing Based on Merit of the Idea Structured prioritising and portfolio management Balance exploration and exploitation projects Iterative process Prototyping and beta-testing End-to-end Ownership with Single Team Strong consumer involvement Rapid diffusion across markets and platforms Consumer involvement and fast upgrades Openness to encourage complementary products Source: Capgemini C4 Lab analysis. Harvard Business Review, “The Innovation Value Chain”, 2007

Even other industries give early examples of radical innovation practices Early Adopters of New Approaches to Innovation In-House Cross-Pollination External Spread Development Players ?? Minitel Initiatives Selection Idea generation Conversion Diffusion Source: Capgemini C4 Lab analysis. Harvard Business Review, “The Innovation Value Chain”, 2007. Company Websites. Allows Employees to spent 15% time on own projects Promotes Cross Functional ‘Communities of Practice (Connect+Develop External) Developed Innocentive, an online IPR Trading Forum Launched “Game Changer” for Financing Employee Ideas Realisation of Imagination breakthrough projects Free Sabre Terminals Prioritised American Airlines flights

Innhold

For most organizations, there are challenges at every stage Challenges Implications Many Factors May Impede Innovation Source: Capgemini C4 Lab analysis. Idea generation Conversion Diffusion

Large employee bases dedicated to operations and routine tasks

Low innovative culture and strict hierarchy

Little collaboration across units

Current organization priorities

Expectation for immediate results and returns

Legacy nature of services

Focus on markets within direct reach

Employees cannot generate a large number of good ideas

Lack of diverse perspectives on ideas generated within an unit

Selection criteria may eliminate potentially good ideas

Limited tolerance for experimentation and failure of new products

Diffusion limited by geographic markets and delivery platforms

And bottlenecks at any stage can impede the capacity to innovate The capacity to innovate is only as strong as the weakest link in the innovation value chain Development of GUI, Mouse, Ethernet and Laser printer Diffusion of Betamax Standard

Bottlenecks can hamper organizations from exploiting opportunities with tremendous market potential.

Source: Capgemini C4 Lab analysis. Company Websites Development of Telefax, Transistor, Laser, UNIX, C Idea generation Development Diffusion

Getting innovation right, organisations have to master seven different, but certainly interlinked, dimensions Select the right people to fuel the organisation’s innovative capabilities 1 Apply appropriate organisational levers to develop a culture of innovation 2 Foster creativity and collaboration across divisions and functional silos 3 Bring structure and discipline to all phases in the innovation value chain 4 Leverage data to prioritise projects and maintain a balanced project portfolio 5 Ensure resources and infrastructure to get speed into project execution and project upgrades based on customer feedback 6 Track innovation performance, learn quickly and continuously upgrade practices 7 Seven dimensions of innovation success The road to innovation leadership is demanding, but rewarding !

If you need to strengthen your innovation capabilities, the first and most important step is to review and revise your innovation strategy Phase 1 Review innovation strategy

Key activities

Identify value creation potential across different innovation type

Assess current innovative capabilities

Assess competitive position and potential for differentiation

Explore opportunities to leverage external resources and network

Identify and evaluate strategic options

Decide innovation ambition level

Formulate/review current innovation strategy

Phase 2 Develop new innovation approach Phase 3 Introduce new innovation approach Phase 4 Track innovation performance Innovation capability enhancement framework A Capgemini Consulting Service Offering Norwegian companies should investigate their innovation value chain and selectively introduce new practices to fuel their innovation capabilities.

Backup Anders Rygh Capgemini Consulting Principal | Head of Business Strategy Mobil: +47 95 11 81 33 [email_address]