Univ Mich Ross - Innovation Strategy

Innovation in Today’s World

Aki BaloghDiamond Management & Technology Consultants

March 10, 2008

Page 2Project Folder; Area Folder; Name; Date© 2008 Diamond.

Page 2

• Introduction- Analyst with experience in market strategy, market sizing, analytics, project

management, and IT strategy - Born in Hungary, resides in Chicago

• Education- Bachelor of Business Administration, Ross School of Business, University of

Michigan- Associate Degree in Business Computer Programming, Washtenaw Community

College

Professional Background: • Aki Balogh is an Analyst with Diamond Management and Technology Consultants. Since joining

Diamond in 2007, Aki has worked on - Strategic analytics project for a top 3 bottling company- IT Strategy for the CIO of an $8B transportation company- Common process roll-out for a top 3 health insurer

• Before Diamond, Aki interned at Microsoft where he performed a market opportunity assessment for the MS Learning group

Who is Aki?


Page 3

Questions around innovation

1. Once a firm has recognized the potential of an innovation, what is the best way to adopt it?

2. What role does a firm's environment play, if any, in its ability to innovate?

This presentation will focus on how innovation can be adopted within an organization. It will also examine the effect of environmental factors.


Page 4

Our Understanding• [Large] companies go out of business all the time

– In the 40 years between 1957 and 1997, 85% of companies on the S&P 500 in 1957 had fallen off the list by 1997

– Only 12 of the 74 survivors outperformed the index– In 1998, the expected duration of a company on the index was 10 years

• Globalization has given companies access to the best talent, markets, and resources in the world, resulting in increased competition

• Continuous business renewal is important– 95% of companies hit a “stall point” in their existence and have only a 1-in-6 chance

of returning to growth– 40% of commercial airline crashes in the US are due to Continuous Flying Into

Terrain (CFIT). In other words, seasoned experts are being given good information by reliable instrumentation… and they still crash!

Source: The Calculus of Commerce, John Sviokla.

Honest and vigorous self-renewal is critical to long-term survival.


Page 5

What is innovation?

‘Innovation’ is the process of turning an original idea into a completely new, valuable product (or service) and bringing it successfully to market.

Innovation = Invention + Commercialization


Page 6

Core Business Enablers

Improving “A” Processes

Improving “B” & Reshaping “A”

5-10%of average investment



Source: Chunka Mui’s Innovation Framework and Diamond Analysis.

Continuous

Discontinuous

What types of innovation exist? Firm


Page 7

How do companies innovate?Operational and product differentiation model

Structural Innovators launch fewer unsuccessful offerings and bring in more profit than Incremental Improvers.

Structural innovators combine product differentiation and operational differentiation to create long-term value

Diamond’s Innovation FrameworkInnovation Category vs.

Revenue and Profits

Source: “Structural Innovation for the 21st Century. “ Diamond Insight. Source: Kim and Mauborgne, “Value Innovation: The Strategic Logic of High Growth”.

Ope

ratio

nal D

iffer

entia

tion

Product* Differentiation* Product Innovation is defined as a customer offering and includes services that are marketed.

Operational Innovation

StructuralInnovation

Continuous Improvement/ Best Practices

Product/ServiceInnovation

Zara

US Steel

GE

Motorola

Structural Innovation

Incremental Improvements

Firm


Page 8

• SIBs: Stay in Business InvestmentsInvestments in infrastructure or capabilities fundamental to business; hard to quantify

• ROIs: Project InvestmentsInvestments that take existing capabilities and make them “faster, better, cheaper”

• OCIs: Option Creating InvestmentsInvestment with high risk, high reward; can fundamentally alter competitive position

Definitions

Source: Diamond Analysis.

Portfolio Investment Model

Companies should manage a portfolio of investments holistically and should not be afraid to kill unsuccessful investments.

How do companies innovate?Managing a portfolio of innovation investments

Com

petit

ive

Impa

ct

Advantage

Parity TraditionalROI

Enabling SIB

Required SIB

SIB ROI OCI

Investment Categories

Tactical Strategic

OCIExercisedOCI

Firm


Page 9

How do companies innovate?Client examples from Diamond’s work

High-quality, flexible technology platforms are enablers of business innovation.

Innovation Enablers Capabilities Gained

• Continuous renewal of capabilities• Ability for quick integration into

integration into technology, platform, and processes

• Modular infrastructure allows quick integration of acquisitions

• Rapid evolution of new business models

• Speed to market• Real-time decision-making

• Strong capabilities in clinical analytics• Information-centric IT architecture• Capability to define and act on

operational rules

• Improved ability to new products that are demanded in the marketplace

• Enhanced ability to identify risks across functions

• Faster speed-to-market of products

Source: Diamond Analysis.

GoldmanSachs

Aetna

Firm


Page 10

What impact does a firm’s environment have on innovation?

There is correlation, but not causation, between technology innovation and industries. One innovative company can transform industry dynamics.

• Certain industries tend to be more innovative than others

• However, sluggish companies create opportunity for a faster entrant to overtake them.

Examples:- Cemex in the cement

industry- Amazon.com

overtaking B&N- Netflix overtaking

Blockbuster

ExampleDrivers

Regulation

Geography-dependence

Customer demands

Historical investments

Source: Diamond Digital IQ Study.

Drivers Technology Enablers Ability to Innovate

22

23

24

25

26

27

28

29

30

25 26 27 28 29 30 31 32

Utilities

Media

US FederalGovernment

Manufacturing & Distribution

Travel & Hospitality

Insurance

High Tech

FinancialServices

Healthcare &Pharma

(Average OO: 25.3)

(Average SO: 29.4)

Consumer Packaged Goods & Retail

Diamond Digital IQ Industry Index

Strategic IT Quotient

Ope

ratio

n IT

Quo

tient

Env’t


Page 11

Five Best Practices from Thomas Edison

Source: Innovate Like Edison, Sarah Miller Caldicott.

Toyota

IDEO

Int’l TruckingRoss

Microsoft

Firm


Page 12

Learnings and Takeaways

• Innovative companies tend to be more successful

• Innovation is a process, not an event

• Build a strong [technology] foundation to enable innovation

• Sell whole platforms, not products

• One innovative company can transform an entire industry

To be effective innovators, organizations must structure and energizeat all levels to create a culture of innovation.

Appendix


Page 14

“[the problem] …in the straightforward search for profit and growth, some very capable executives in some extraordinarily successful companies, using the best management techniques, have led their firms toward failure.”

“[the solution] ...established firms that successfully built a strong market position in a disruptive technology were those that spun off from the mainstream company an independent, autonomously operated organization.”

Clayton M. Christensen

The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail

AppendixWhat is Innovation?


Page 15

Core Business Enablers(CBEs)

Focused Business Improvements(FBIs)

Technology Driven Innovations(TDIs or OCIs)

Assets that form the core IT infrastructure of the organization

Assets and projects aimed at incremental operational gains

Option creating investments with power to transform

5-10%of average portfolio



Business unit level

Enterprise level

Source: Diamond Field Team analysis

Portfolio of investments in IT assets and projects

Appendix Innovation Framework Applied


Page 16

Core BusinessEnablers

Focused Business Improvements

Technology Driven Innovations

• Keep lights on• Regulatory compliance

• Network firewall

• Cost per unit of service• Service levels• Risk exposure

• IT

• Against budget• Lowest cost at or

below acceptable risk

• Break compromises• Create options

• In-store kiosk pilot

• Milestones• Portfolio ROI target• Option value

• Business

• Against deliverables• Try often, kill early• Seek partners

• Improve operations• Faster, better, cheaper

• CRM application

• On-time, in-budget• Project NPV, IRR• Business objectives

• IT (enterprise)• Business (unit)

• Against specific business objectives

• Positive NPV

Objectives

Example

Criteria

Primary Owner

Manage-ment

Source: Diamond Field Team analysis.

Appendix Portfolio Management Theory:Each category is assessed and managed differently


Page 17

Internal and ExternalPlatforms

Partners/Alliances

Distribution

BrandKey Assets

People

TechnologyProcess

Organization

PLATFORM

PLATFORM

Location

Customers

View your products as platforms1

View your business as a platform

2 Internal

External

Product(s)Services

Source: Chunka Mui

Appendix Consider both internal and external platforms


Page 18

Appendix Types of business platforms

Platform TypesBusiness platforms can be characterized into four types:

“Application Nests”

“Knowledge Flexors”

“Standards Owners”

“Asset-Parlay-ers”

These companies provide a platform where other host others’ applications.

Examples: Microsoft, Palm

These are companies that own standards in which others cannot must conform to.

Example: Visa

These companies have leveraged their skills and contacts into new businesses.

Example: UPS, HP

These companies have used existing assets in new ways to launch follow-up killer apps.

Example: Wal-Mart

Source: Chunka Mui.


Page 19

Source : 3M, Diamond analysis

• General research

• Focus on customer needs

• User researchKeyActivities

Interactions

3M has operationalized an innovation process that is heavily dependent on internal resources and consumer testing.

Marketing, sales

Corporate R&D labs

Manufacturing

• Researchconsumeracceptance

• Technical definition • Develomt. • Manuf. and marketing

AppendixExample of a structured approach: 3M’s innovation process


Page 20

Appendix Innovation through technology: Why does IT matter?

“Companies with high Digital IQ view information technology of both strategic and operational importance and … [can] harness IT to help power

their companies.”

Question: To what extent do you agree that IT will play a major role in the strategic success of you r business

Source: Diamond Management & Technology Consultants

IT Plays a Major Role in the Strategic Success of Most Businesses

Totally Agree

Somewhat Agree

Neither Agree Nor Disagree

Somewhat Disagree

Totally Disagree

0% 10% 20% 30% 40% 50% 60%

BusinessIT


Page 21

Appendix Who is Diamond Management & Technology Consultants?• Who we are: Change agents focused on the single biggest disruptive force in our

economy today – Information Technology• What we do: Create business value through a more insightful understanding and

application of technology and customer needs

Sample Offerings:

• IT Strategy / Effectiveness

• Product Launches / Complex Program Mgt.

• Customer Experience Design

Diamond's service offerings combine understanding of Information Technology & customer needs

Business Value

Information Technology

Customer Understanding


Page 22

Appendix How does Diamond work?

Business Operations

Stra

tegy

&

Ana

lytic

s

Systems Integrators and OutsourcersEx

ecut

ion

Technology

Functionally or Industry-specific

Consultants

Traditional Strategy

Consultants

Former Big 5 Consulting Practices

Diamond creates value by solving problems at the intersection of business and technology.

Integrating Business and Technology