Innovation – there is no optionAlistair Keddie

WIMRC Seminar, 27 February 2007

2

Innovating Companies

• Grow faster than non-innovators

• Are much more profitable

• Sustain higher performance

(From an analysis of 500 listed companies by Geroski & Machin)

3

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

4

Zone 3Transformational Innovation

Zone 2Relative 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 1Incremental Innovation

Minor product or service enhancementseg the new LandRover Discovery

Coke with lemon Improved customer care

Levels of Innovation

5

Some quotesThe 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)

6

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)

7

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

8

Global R&D Growth Rates, 2000 – 2005(From Booz Allen Hamilton, 2006)

5.22.3 3.8

1719.7

0

5

10

15

20

25

NothAmerica

Europe Japan China &India

Rest ofWorld

%

9

Value Added by Knowledge Based Services and Industries

Finance, insurance, other business services, community, social and personal services

G7 comparison, 2000Per 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

10

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.

11

• 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

12

Capacity to absorb and adapt new

knowledge

Competition &entrepreneurs

Networks &collaboration

Regulatoryenvironment

Access to finance

Sources of new knowledge

Innovation

CustomersSuppliers

Critical Success Factors

13

Inputs OutcomesBusiness

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 processesR&DPeople• Culture• Organisation• SkillsMarketingRelationships

Influences

Activities

Value AddedProductivity Economic Growth

Employment

Environmental QualityHealthPublic goods and

services

Knowledge

Business Innovation

14

Public Policy Context for Business Innovation

Businessinnovation

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

15

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.

16

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

17

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

18

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 ?

19

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. Low intensity (1.1% to 2.4%). Includes beverages, food producers and telecomms.

• Group 5. Very low intensity (up to 1%). Includes construction, oil & gas, mining and utilities.

20

21

22

23

24

25

Performance of High-Leverage Innovators(From Booz Allen Hamilton, 2006)

1.21.8

2.5 2.9 3.3 3.4

6.3

0

1

2

3

4

5

6

7

Gross Margin OperatingMargin

ShareholderReturn

Sales Growth OperatingIncome Growth

Gross ProfitGrowth

Market CapGrowth

94

Co

mp

an

ies

/90

6 C

om

pa

nie

s

26

High–Leverage Innovators: Geographical Distribution (From Booz Allen Hamilton, 2006)

48

1016 20

0

10

20

30

40

50

60

North America Europe Japan Rest of World

Nu

mb

er o

f C

om

pan

ies

27

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

28

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

29

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)

30

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)

31

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?

32

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