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

Page 2 Innovating for growth

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:
VR Ferose
► Used much smaller teams
Managing Director and ► Used “champions” to promote the new approach
Senior Vice President
SAP Labs India throughout the company


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

Innovation spiral

External environment Business outcomes
Capitalize

Achieve
► Technological advance ► Profitable growth
► Regulatory uncertainty ► Customer engagement
► Macroeconomic trends ► Business sustainability
► Ecological concerns ► Productivity
► Demographic shifts ► Business agility

Areas of innovation

Innovation process

External collaboration

Innovation enablers


A The external environment
Capitalize on the opportunities

► Identifies the major market and economic circumstances that
External environment
affect business.
► Technological advance
► These elements increase global exposure to risk, but they also
► Regulatory uncertainty
offer major opportunities that can transform whole industries.
► Macroeconomic trends

► Ecological concerns
► Innovative companies know how to capitalize on the external
► Demographic shifts
environment to turn even adverse conditions to their advantage.


B The innovation spiral
Achieve competitive advantage by innovating

Innovation spiral 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.


C Business outcomes

► The business outcomes show that companies innovate to
Business outcomes
achieve five key business outcomes.
► Profitable growth
► The challenge is to focus on all of these outcomes together,
► Customer engagement
rather than favoring one over another, which compromises
► Business sustainability
the ability to anticipate change and drive growth.
► Productivity

► Business agility


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


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

Innovation spiral

Capitalize

Achieve


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
John O'Halloran experiment with wind power to maintain factory productivity.
President of Technology
Suzlon Energy Ltd. ► 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.


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

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,
John Waibochi
CEO thanks to a broad perspective, which enabled us to understand where our true strengths lie
Virtual City 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
Dr. Christina
Lampe-Onnerud opportunity for me,” says Christina Lampe-Onnerud, Founder and International Chairman
Founder and of Boston-Power. “Our insight suggested that China’s policymakers had stimulated the
International Chairman customer base to enable a market in electric cars. In a sense, the government became
Boston-Power, Inc.
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.”


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
John O'Halloran
President of Technology
element of the technology initiatives in the Plan,” says the company’s managing director for
Suzlon Energy Ltd. 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


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

Innovation spiral

Capitalize

Achieve


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.


1 Sharing risk and reward

► 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,
Dr. Christina Lampe-
Onnerud
they accessed spare capacity on manufacturing lines
Founder and and paid a contract manufacturing fee per battery.
International Chairman
Boston-Power, Inc.
► 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.


2 Collaborating with competitors

► 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.


3 Creating an independent licensing
and royalty model

► 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
Bill Parsons for the two companies involved. The revenue from this model
Executive Vice President has supported the further development of ARM’s own
of Human Resources
ARM microprocessors, which now have a 95% market share in
mobile phones.


4 Building the right mindset and culture

► 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)


C Are you innovating to achieve specific
business outcomes?

Innovation spiral

Capitalize

Achieve


Innovative companies focus on five
key business outcomes
► 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.


1 Profitable growth

► 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.


2 Customer engagement

► 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.


3 Business sustainability

► 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.


4 Productivity

► 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.


5 Business agility

► 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.


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.
.


Recommendations for capitalizing on changes in the
external environment

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 navigating the innovation spiral

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


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.


Ernst & Young
Assurance | Tax | Transactions | Advisory
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© 2012 EYGM Limited.
All Rights Reserved.
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This publication contains information in summary form and is
therefore intended for general guidance only. It is not intended to
be a substitute for detailed research or the exercise of professional
judgment. Neither EYGM Limited nor any other member of the
global Ernst & Young organization can accept any responsibility for
loss occasioned to any person acting or refraining from action as a
result of any material in this publication. On any specific matter,
reference should be made to the appropriate advisor.

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