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Organisation Innovation Start Ups Incubators Clusters Innovation Networks Spin-outs Alliances Outsourcing And Off-shoring Pushing The Boundaries Of The Firm Small & Medium Sized Enterprises

Strategic Innovation - trends, challenges and best practices

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Page 1: Strategic Innovation - trends, challenges and best practices

Organisation InnovationOrganisation Innovation

Start Ups

Incubators

Clusters

Innovation Networks

Spin-outs

Alliances

Outsourcing And

Off-shoring

Pushing The Boundaries Of The Firm

Small & Medium

Sized Enterprises

Page 2: Strategic Innovation - trends, challenges and best practices

Innovative Business

Organisation

Innovative Business

Organisation

Organisation Design

Mega Trends

?OutsourcingAnd

Offshoring

Understanding Innovation

And Organisations

Setting the Climate And ConditionsFor Sustainable, Innovative

Organisations

Time Management

Clusters And

Innovation Networks

Our World In The Next

10-20 years

InfluencingOthersBuilding And

Managing Alliances

Page 3: Strategic Innovation - trends, challenges and best practices

Our World In The Next 10-20 YearsOur World In The Next 10-20 Years

Page 4: Strategic Innovation - trends, challenges and best practices

Organisation Technology

The Future

Everything Around Us Is Changing….

Context People Trends Generational

Service

$

Page 5: Strategic Innovation - trends, challenges and best practices

I thought …

• I had a job for life• my skills would last a life-time• my food was safe• my government would care for me in old age• my savings policies were guaranteed• politicians could be trusted• information was held in libraries• institutions were ‘secure’• the enemy was in ‘the east’• the EEC was a trading group• it was good to have less children• and they would leave home before 25• we would always be manufacturers• a telephone had to be plugged in• that loyalty counted for something• that the trains and planes were safe• I’d die around 70

So what hasn’t changed?

Page 6: Strategic Innovation - trends, challenges and best practices

Personal information will become a saleable commodity

Work life balance replaced by work life divide/bend

Employee retention a key measure of corporate performance

Privacy, spirituality, and an aversion to being seen as a cog in themarketing gears of thousands of companies will stir new approaches.

Inter generational politics and wealth sharing becomes a major issue

Lingering age prejudice drives out of the market precisely those olderworkers whom the young will then resent having to support.

Society divides on generational lines - each one espousing different value sets

Attitudes towards working mothers and children in general becomemore friendly as the demographic problem becomes better known.

Women will become more important in business organisations. Therewill be a feminisation of the society as a whole

Peop

le

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• Customers are becoming more cynical and therefore demanding.

• Shift from choice (already too much) to fitness for purpose / needs

• Consumer tolerance for "either / or" choices will decline significantly. They will want it all when they make significant buying decisions.

• Consumers will increasingly grow to need assistance in making choices from the great amount of information that will be available

• In the short term, the customer service will continue to move offshore. There will be a public backlash against companies that rely extensively on outsourced service

• People will depend on fewer providers to be their source of goods and services.

• People equate service with relationships which means other people. They may use technology to communicate; but, a "real person" is still the goal.

Cu

stom

er

Reduction of complexity

Matching expectations

Understanding

Relevance

Short cuts

Advice

Time

Guide/coach

Page 10: Strategic Innovation - trends, challenges and best practices

Org

anis

ati

on

• There will be major power struggles between governments and multinationals and other corporations

• More Outsourcing, BPO and offshoring

• Partnerships, Joint Ventures and Alliances will become more important than mergers & acquisitions.

• The growth of international networks and temporary relationships within these networks and are smaller, nimbler, quicker.

• Organisations which are not quick to anticipate and change will not survive

• Wal-Marti-zation: "Wal-Mart is the logical end point and the future of the economy in a society whose pre-eminent value is getting the best deal.“

• Managing the corporate brand is going to become more important and any corporate 'irresponsibility' could result in a brand dying overnight.

• Evidence of trustworthiness will be more important.

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Tech

nolo

gy •A huge growth in "designer"

drugs aimed at areas such as hair growth, fat reduction, child sex selection etc

• Next generation communications leading to very cheap and fast video conferencing coupled with an energy crisis -> reduced travel, home working etc.

• Intelligent / functional clothing

• Bio / life technologies will have an overwhelming impact

• Insurance companies will use bio-information analysis to predict behaviour and set costs. There will be major issues over privacy raised from this.

• Green energy becomes popular and is forced on industrial west.

• In 10 years: Artificial intelligence will automate quite a lot of present work done by humans.

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So what will it all look like ?...

Privacy Personal information will be guarded by consumers.

Market Of One.Personalisation and dynamic pricing become the norm

Networked OrganisationsPartnerships and alliances beat the diy enthusiasts

Leveraging The BrandTrusted brands will become even more important than today.

Cyber WarsCriminals will exploit electronic business

Technology OverloadWe’ll struggle to implement the technology we need to be winners.

FlexibilityFlexibility overtakes efficiency as a critical success factor

Page 21: Strategic Innovation - trends, challenges and best practices

Globalisation

Shift ToServices

$Rising Costs

DemographicChanges

GrowingImportance

Of Knowledge

Access To Finance

EnvironmentalIssues

Page 22: Strategic Innovation - trends, challenges and best practices

Organisation Design Mega TrendsOrganisation Design Mega Trends

Page 23: Strategic Innovation - trends, challenges and best practices

Stability

Stability

Change

Change (No Periods Of Stability)

Major Discontinuity

Major Discontinuity

Industrial Age

Information Age

Page 24: Strategic Innovation - trends, challenges and best practices

Markets are becoming much more open

Dynamic Competition

Growth And Earnings Pressures

Deregulation

Knowledge Based Competition

Demand For Solutions

Technology is enabling global trading and new business models

Page 25: Strategic Innovation - trends, challenges and best practices

Supplier

Distributor

ManufacturerReseller

Consumer

Existing Industry Value Chain

Direct Sales

Direct Sales

Value chains are increasingly disaggregated with activities distributed to their most economic or strategic locations. Companies need to identify the precise areas where they have, or can build, distinctive strengths that will enable them to compete effectively

Page 26: Strategic Innovation - trends, challenges and best practices

Value creation no longer cordoned within bounds of corporation…

Integrated Value Chain

Unbundled Value Chain

High transaction costs advantage vertical integration, primary value creationactivities within firm

High transaction costs advantage vertical integration, primary value creationactivities within firm

Falling transaction costs permit verticaldisintegration of primary value creation activities and advantage outsourcing, withcontractual relationships substituting for boundaries of firm

Falling transaction costs permit verticaldisintegration of primary value creation activities and advantage outsourcing, withcontractual relationships substituting for boundaries of firm

Contingent Value Alliances

Previous unbundling of value-added activities creates opportunities to gain competitive edge through multiple sourcingon contingent basis

Previous unbundling of value-added activities creates opportunities to gain competitive edge through multiple sourcingon contingent basis

Standardized systems enable corporations to assemble alliance partners on as needed basis, thereby enhancing flexibilitynecessary to exploit brief windows of opportunity

Standardized systems enable corporations to assemble alliance partners on as needed basis, thereby enhancing flexibilitynecessary to exploit brief windows of opportunity

Value Webs

Alliance Partners Date ProductCisco, EDS October 1997 Mainframe for Internet/intranet integration servicesCisco, Hewlett-Packard October 1998 Internet Platform for combined data, voice, videoCisco, Telcordia October 1998 Open telephony architecture for packet-based networksCisco, HP, EDS November 1998 Turnkey Web site for business-to-business e-commerceCisco, KPMG January 1999 National Solution Centers to showcase networked solutionsCisco, Microsoft January 1999 Network security solutions for enterprise computingCisco, HP, EDS April 1999 Internet protocol usage management and billing system for

ISPsCisco, PeopleSoft April 1999 Quality of Service solutions for end-to-end policy networking

Page 27: Strategic Innovation - trends, challenges and best practices

Sales & MarketingManagement

Product Develpt& Marketing

IT Development & Management

Network Development & Management Order Fulfillment &

Service Activation

ServiceAssurance

Billing & Collections

HR Management Financial & Asset Management

Supplier & Partner Management

Customer Care

Substitution of Information for HierarchyFalling cost of delivering information throughout the organization resulting in formal organizational hierarchies giving way to more nimble, network-based structures.

Early experience in a number of industries suggests that organizational structures will evolve to take advantage of an increasingly “connected” workforce.

That said, the vast majority of firms are not yetradically changing their corporate structure to facilitate new decision making behaviors. Still playing out is the degree to which firms will utilize richer information flows to optimize current decision-making practices withoutfundamentally altering corporate structures.

Page 28: Strategic Innovation - trends, challenges and best practices

Product/service preferences

(configuration, performance, bundling,price sensitivity)

Behavioral data

(purchase history, channel shopping)

Customer

Supplier

Interactive Customer RelationshipsFalling cost of interaction and connectivity enabling companies to capture unprecedented amounts of data about their customers and to deliver increasingly individualized value propositions.

Demographic data

(age, gender, family, home/work locations)

Financial data

(income, assets, credit history)

Filtered marketing

(appropriate in format, relevant to needs)

Customized products, services

(configuration, performance, bundling)

Anticipation of needs

(event-triggered contact)

Direct compensation

(with products, services or cash)

Customer Benefits• Products/services better match individual needs• Less time wasted by irrelevant marketing• Fair compensation for true value of personal information• Supplier anticipates needs and proposes solutions without prompting

Supplier Benefits• Lower marketing costs from targeting most responsive customers• Lower inventory costs from build-to-order automation and improved demand projections• Enhanced loyalty from relationship building, lock-in • Higher margins from targeting most valuable customers

Page 29: Strategic Innovation - trends, challenges and best practices

From Mass Market to Mass Customization

TransparentCustomization

CosmeticCustomization

AdaptiveCustomization

CollaborativeCustomization

Provides individuallycustomized goods orservices without explicitlyinvolving customersin customization process

Presents standard product differently to different customers through packaging or display

Offers standard butcustomizable productdesigned to allow usersto alter its performancethemselves or to respond automatically to user needs

Conducts “dialogue” withindividual customers tohelp articulate needs,identify and create preciseoffering to fill those needs

Customers who wouldappreciate customizedproducts but for whomdirect collaborationrequires excessive effort or intrusion

Customers who aresatisfied with standard products but desirecustomized presentationor packaging

Customers whose needs vary greatly from use to use or from person toperson

One-time design decisionsinvolving trade-offs (e.g., length for width, comfort for fit, complexity for functionality)

Supplier-Led Customization Customer-Led Customization

Page 30: Strategic Innovation - trends, challenges and best practices

Network Effects and Serial MonopolyNetwork effects are being used to explain the explosive growth patterns that are often seen in the information economy. A network effect is where dominance is rapidly achieved by firms that capture a critical share of the market. Most researchers are pointing out that dominance is unlikely to be sustained for long periods of time as innovation allows competitors to initiate a race to a new tipping point.

1965 1970 1975 1980 1985 1990 1995

Emergence in 1983 of the first fax machines based on the G3 standard,which enabled fax machines from different manufacturers to communicate…

Emergence in 1983 of the first fax machines based on the G3 standard,which enabled fax machines from different manufacturers to communicate…

…increasing the value ofthe fax network to allexisting and future users,and leading to explosiveindustry growth rates

…increasing the value ofthe fax network to allexisting and future users,and leading to explosiveindustry growth rates

Page 31: Strategic Innovation - trends, challenges and best practices

Corporate Leadership

Business Unit leaders

Departments, functions, teams and employees

Decentralisation offers close proximity between business lines and marketsand thus fosters cultures of agility, speed and empowerment. As such,businesses for which intimate customer knowledge and rapid response tochanging conditions are critical benefit from decentralised structures.

Decentralisation offers close proximity between business lines and marketsand thus fosters cultures of agility, speed and empowerment. As such,businesses for which intimate customer knowledge and rapid response tochanging conditions are critical benefit from decentralised structures.

The Argument For De-centralisationThe Argument For Centralisation

Even in customer-centric businesses, centralised controls may be necessaryto engender common culture and values and maintain accountability forstandards such as risk management and ethical behaviour. Centralisedstructures also provide links between otherwise insular groups whencross-functional coordination is required.

Even in customer-centric businesses, centralised controls may be necessaryto engender common culture and values and maintain accountability forstandards such as risk management and ethical behaviour. Centralisedstructures also provide links between otherwise insular groups whencross-functional coordination is required.

Page 32: Strategic Innovation - trends, challenges and best practices

Considering Competencies

To restructure effectively, organisations must consider the competenciesthat, when maintained at the corporate level or pushed to the line, exploitcompetitive advantage, and achieve balance among the inevitable tradeoffsbetween cost, control and access to markets.

To restructure effectively, organisations must consider the competenciesthat, when maintained at the corporate level or pushed to the line, exploitcompetitive advantage, and achieve balance among the inevitable tradeoffsbetween cost, control and access to markets.

Focus on innovation will lead to decentralised structures…

Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4

…while focus on product quality will lead to centralised structures

Page 33: Strategic Innovation - trends, challenges and best practices

Traditional firm activity boundaries with suppliers and customers are breaking down as information technologies make enriched and more continuous information flows with parties traditionally “outside” the firm much more economic.

You

Your CustomersYour Suppliers

Page 34: Strategic Innovation - trends, challenges and best practices

The Internet as interaction revolution

“The Information Revolution is allowing us to radically change the cost of interaction just as the machine changed the cost of making things. For example, today, at Boeing, we can design an airplane in St. Louis, Seattle, and Farnborough, England, and have the pieces fit together and assembled in Palmdale, California. Glass fiber carries the billions of bytes of data from one site to another and allows us to work in many different places.”

-Phil Condit, CEO, Boeing Corporation

Page 35: Strategic Innovation - trends, challenges and best practices

Geographical boundary decision

Geographical boundary decision

Locating in physical space

Locating in physical space

Competitive advantage of

locations

Competitive advantage of

locationsChallenge – coordinating

activities acrossgeographies

Challenge – coordinating activities across

geographies

Two key organizational questions

Where to locate activities?

Firm scope decisionFirm scope decision

Locating in capability space

Locating in capability space

Core competencies of the firm

Core competencies of the firm

Challenge -Coordinating activities of

partners and suppliers

Challenge -Coordinating activities of

partners and suppliers

How to compete in the value chain?

Page 36: Strategic Innovation - trends, challenges and best practices

Aggregated, Vertically Integrated

Disaggregated, Virtually Integrated

Back End Operations

Front End Operations

Coupled, Co-located

Location

Scope

Front End Operations

Back End Operations

Decoupled, Flexibly Located

•Centralized •Robust •Scalable •Standardized

•Decentralized •Flexible •Personalized •Contextualized

How the network impacts the structure of the corporation

Page 37: Strategic Innovation - trends, challenges and best practices

Internal decoupling (of the firm’s activities) Firms can decouple back-end infrastructure and shared services from front-end customer facing functions. By centralizing and relocating shared services, firms can maximize comparative advantage across geographical boundaries.

External disaggregation (of the value chain) As business interactions move to electronic networks, interactions costs are reduced. Activities that companies have always believed to be central to their businesses can be offered by specialized entities that offer economies of scale and skill. Firms can disaggregate activities to maximize comparative advantage across firm boundaries.

The future shape of the corporation: Decoupling and Disaggregation

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The decoupled organization

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Front-back decoupling at Citibank

Page 40: Strategic Innovation - trends, challenges and best practices

Geographical decoupling at GECIS (India)

GE Capital International Services employs 10,000 people in India and delivers over 450 processes to thirty different businesses in US, Europe, Japan and Australia. GECIS services 15 of the 20 top businesses in GE. It is the largest private user of international bandwidth (76Mb/sec by Dec 2002). In 2002, GECIS created 5 “capability clusters” called Centersof Excellence (CoEs):

•Finance and Accounting CoE•Collections CoE•Customer fulfillmentCoE•Insurance CoE•Industrial & Equipment Business CoE

Page 41: Strategic Innovation - trends, challenges and best practices

SharedValues

Structure Systems

Strategy

Skills

Style

Staff

A set of actions aimed at gaining a competitive advantage

A set of actions aimed at gaining a competitive advantage

How the business or organisation is organised

How the business or organisation is organised

Core capabilities Core capabilities

The formal processes and procedures for doing things

The formal processes and procedures for doing things

Basic ideas about what is right and desirable

Basic ideas about what is right and desirable The way executives

collectively behave, focus, use time, communicate

The way executives collectively behave, focus, use time, communicate

Corporate demographics Corporate demographics

Taking A “Systems” View Of Organisation Design

Page 42: Strategic Innovation - trends, challenges and best practices

SharedValues

Structure Systems

Strategy

Skills

Style

Staff

“There is no universal, ‘one best’ way to organize,” because organisational structure is only “themechanism that takes strategy, in the context of environment, resources, and history, andtransforms it into output.”

Nadler and TushmanOrganizational Architecture:Designs for Changing Organizations

Page 43: Strategic Innovation - trends, challenges and best practices

Understanding Innovation And Organisations

Understanding Innovation And Organisations

Page 44: Strategic Innovation - trends, challenges and best practices

Knowledge Creators

Public Sector

Private Sector

Knowledge Users

Social and Human Capital

UniversitiesS&T Training and Education

Absorptive CapacityFollower firms; Intermediate and End UsersMarket for Goods and Services

Research CapacityUniversities; Government LaboratoriesBasic Scientific Research

Technology and Innovation Performance

Creative FirmsApplied RTD and Product /Process Development

A Simple Innovation System

Characteristics ofinnovation-led companies:• a world wide focus, often requiring early expansion overseas;

• a balanced growth strategy, based on organic growth and targeted acquisitions

to enter new markets or acquire critical expertise;• a balanced investment strategy;• above average investment in market led research and development (R&D);• a focus on what really matters to the customer; and• an innovation culture with corporate leadership that expects growth through development of new products and services.

Page 45: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Processes(HOW)

Channels(WHERE)

A 360 Degree View Of Business Innovation

PlatformsR&D

NetworkingSolutions

Value Chain

Logistics/Supply Chain

CustomerExperience

Revenue Model

INCREMENTAL

SUBSTANTIAL

RADICAL

Create new products or new services

Create new products or new services

Create modular platforms and strategic Control points

Create modular platforms and strategic Control points

Solve “end-to-end” problems for customers

Solve “end-to-end” problems for customers

Find new customer segments or unmet customer needs

Find new customer segments or unmet customer needs

Change how customers interact with you

Change how customers interact with you

Change how you get paid Change how you get paid

Innovate on operating processesInnovate on operating processesChange position or scope of value chain participation

Change position or scope of value chain participation

Change the way you source and ship products

Change the way you source and ship products

Change how you go to market with your products

Change how you go to market with your products

Change how you connect with customers or products

Change how you connect with customers or products

Create new technologies, materials, products, or processes

Create new technologies, materials, products, or processes

Page 46: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Platforms

Processes(HOW)

Channels(WHERE)

R&D

NetworkingSolutions

CustomerExperience

Revenue ModelValue Chain

Logistics/Supply Chain

Dell Computers

INCREMENTAL

SUBSTANTIAL

RADICAL

Page 47: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Platforms

Processes(HOW)

Channels(WHERE)

R&D

NetworkingSolutions

CustomerExperience

Revenue ModelValue Chain

Logistics/Supply Chain

Starbucks

INCREMENTAL

SUBSTANTIAL

RADICAL

Page 48: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Platforms

Processes(HOW)

Channels(WHERE)

R&D

NetworkingSolutions

CustomerExperience

Revenue ModelValue Chain

Logistics/Supply Chain

Innovation Pathologies

INCREMENTAL

SUBSTANTIAL

RADICAL

ScopeMyopia

Page 49: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Platforms

Processes(HOW)

Channels(WHERE)

R&D

NetworkingSolutions

CustomerExperience

Revenue ModelValue Chain

Logistics/Supply Chain

Innovation Pathologies

INCREMENTAL

SUBSTANTIAL

RADICAL

DirectionalMyopia

Page 50: Strategic Innovation - trends, challenges and best practices

Products(WHAT)

Customers(WHO)

Platforms

Processes(HOW)

Channels(WHERE)

R&D

NetworkingSolutions

CustomerExperience

Revenue ModelValue Chain

Logistics/Supply Chain

Innovation Pathologies

INCREMENTAL

SUBSTANTIAL

RADICAL

Horizon Disconnect

Page 51: Strategic Innovation - trends, challenges and best practices

How firms organize for innovation: Five Dimensions

Where do firms focus their

search for innovation?

How do innovative ideas flow in the firm?

How are innovative ideas developed?

Where is the innovation organization located?How is the innovation

process managed?

Inside vs Outside

Top Down vs Grass RootsBuild

internally Buy

Separate from core

Integrated with core

Centralised DecentralisedFormal vs Informal

Page 52: Strategic Innovation - trends, challenges and best practices

These can condensed into 2 underlying factors…

Orientation

GovernanceOrganicOrganicStructuredStructured

Inward OutInward Out

Outward InOutward In

–Focus (internal versus external) –Flows (top-down versus bottom up) –Development (build versus buy)

- Location (centralized versus decentralized) - Management processes (formal versus informal)

•Informal, loose structure •Decentralized–SBU-level •Embedded within SBUs •Multiple, informal linkages

• Formal, tight structure•Centralized–Corporate-level •Separated from SBUs•Few, formal linkages

• Locus of innovation and ideas is external to the firm • Sources of ideas are customers or other firms• Mechanisms focus on “importing” innovation (M&A, venturing) • Innovation flows tend to be top-down and outside-in

• Locus of innovation and ideas is internal to the firm

• Sources of ideas are technologies, knowledge and capabilities

• Mechanisms focus on “exporting” or “leveraging” capabilities and technologies

• Innovation flows tend to be lateral and bottom-up

EXPLORERS ARCHITECTS

MOONLIGHTERS MINERS

Page 53: Strategic Innovation - trends, challenges and best practices

These can condensed into 2 underlying factors…

Orientation

OrganicOrganicStructuredStructured

Inward OutInward Out

Outward InOutward In

EXPLORERS ARCHITECTS

MINERSMOONLIGHTERS

3MShell

E-Bay

Siemens

Motorola

Cisco

Page 54: Strategic Innovation - trends, challenges and best practices

Characteristics…

Orientation

OrganicOrganicStructuredStructured

Inward OutInward Out

Outward InOutward In

EXPLORERS ARCHITECTS

MINERSMOONLIGHTERS

•Explorers tend to be in emerging, rapidly expanding markets (e.g., eBay, Amazon), or they seek to redefine their markets

•They tend to be in markets where speed and agility are key factors for success

•Explorers believe that, in ill-defined and rapidly evolving markets, the external environment (customers and partners) is the key source of insights and opportunities.

•Their basic strategy is to search for customer insights through deep dialogue and collaboration with customers and partners.

•They rely on rapid prototyping and inexpensive testing of large numbers of small ideas, generated through customer insights•

The innovation process is diffuse and embedded in the customer-facing organization.

•Architects tend to be established firms in relatively mature markets, where capital and resource requirements for innovation are intensive.

•The capital intensity and maturity of their markets demands a more structured approach to organizing innovation, and a more centralized approach to funding innovation

•Architects also look externally at customers or other innovative firms for growth and innovation opportunities. However, prototyping and development tends to happen outside the core businesses in a separate innovation organization, or outside the firm through M&A activity.

•Architects tend to have a formal CBD or M&A function if they “buy and assimilate” innovation, or a formal central innovation organization if they prefer to “build and integrate” innovation.

•Driving innovations into the core businesses tends to be a top-down and formal process.

•Moonlighters tend to be large firms in diverse businesses that demand deep technology and process expertise.

•They believe that the best place to look for business innovation is inside the firm, by tapping into tacit knowledge that exists within the firm.

•To be successful, moonlighters need to have a strong innovation culture in the core business, and relatively autonomous business units.

•Moonlighters create “organizational slack” for intrapreneurs to moonlight on innovation projects.

•They create a free market for ideas and talent within the firm, where employees can get funding and resources at the grassroots level to drive innovation.

•Innovation tends to be a bottom-up activity.

•When ineffective, these firms lack a coordinated, strategic view of innovation

•Miners tend to be large firms with deep technology and process expertise, with relatively large monolithic business units.

•Miners tend to have business units with deep silos, and tend not to do well at horizontal collaboration between business units.

•Miners tend to lack innovation DNA within the core businesses, so they require a separate innovation organization to catalyze innovation.

•They believe that the best place to look for business innovation is inside the firm and laterally across the firm.

•Innovation tends to be a top-down activity.

•The innovation organization tends to be centralized and formal, with clearly defined processes and linkages to the core business. •When effective, the innovation organization serves as an innovation clearinghouse, coach, and catalyst. •When ineffective, the innovation organization fails to drive innovation back into the core businesses.

Page 55: Strategic Innovation - trends, challenges and best practices

Making business innovation work requires taking a systemic view

Business InnovationFunding

Culture Strategy

Structure

PeopleProcesses

– What does management say and do to create a conducive environment for business innovation?

– What does management say and do to create a conducive environment for business innovation?

– How well does the firm articulate strategic principles that should guide business innovation?

– How well does the firm articulate strategic principles that should guide business innovation?

– Where is innovation activity located and how is it organized?

– Where is innovation activity located and how is it organized?

– How is the innovation organization staffed, how are incentives created, and how are innovation contributions recognized?

– How is the innovation organization staffed, how are incentives created, and how are innovation contributions recognized?

– How are innovative opportunities generated, developed, and evaluated? How are innovative initiatives driven into core businesses, and how is the innovation organization linked to the core business?

– How are innovative opportunities generated, developed, and evaluated? How are innovative initiatives driven into core businesses, and how is the innovation organization linked to the core business?

– How are innovation initiatives funded? Where are the pools of money located? Where do people go for funding?

– How are innovation initiatives funded? Where are the pools of money located? Where do people go for funding?

Page 56: Strategic Innovation - trends, challenges and best practices

Making business innovation work requires taking a systemic view

Business InnovationFunding

Culture Strategy

Structure

PeopleProcesses

Provide prototyping funding at many levels… and protect it during downturns Siemens Business Systems KM

• KM provides “venture support” funds for developing ideas •A process for idea input, development and diffusion throughout SBS.

Whirlpool • Pools of funding at the SBU level, at Corporate level, and in the Discovery Center –“many ways to say yes”

Prototype… but “rejoice in cancellation”–No firm is exemplar in this!–Incentives must ensure the best projects are selected, not pet projects

Some portion of incentives clearly tied to innovative activityWhirlpool Corporation•30% of Unit General Managers’ evaluation & compensation based on innovation outputHerman Miller•Ideas from idea stage to market = increasing financial bonus

Approach business innovation as designing a new business system, not just new products:

–Herman Miller engages in “business system” innovation, alongside “product innovation” –includes redesign of manufacturing, supply chain, and distribution channels to support new workspace concepts.

–Thomson Financial looks at ways to “embed itself deeper into customer workflows”, and is organized around Strategic Customer Units (SCUs).

Create an “innovation vision” at the top, and make top management the lead evangelists:

–GM’s changed focus –don’t compete with other firms’ cars, compete for customer relationships. Promote “enterprise value” of customer relationships with GM. –Siemens CEO “proselytizes” about the Siemens Global Innovation Network

–Cemex CEO personally evangelizes the innovation effort

Innovate the way you innovate before you have to:

–Tribune Company perceived an impending crisis in print publishing that did not materialize, but preemptively created Tribune Ventures to capitalize on new media –Thomson Financial stopped acquiring and started experimenting before the downturn

Centralize your innovation expertise

Whirlpool –Whirlpool Discovery Center -Centralized place with permanent staff (I-mentors), innovation resources, and funding

–E-Discovery zone-centralized idea submission, access to resources, tools

Baxter –Non-Traditional Innovation (NTRI) –full-time team and funding to incubate opportunities that cut across business units

Dow Chemical –Growth Center to develop and incubate ideas

Siemens Business Systems –Knowledge management function serves as clearinghouse for innovation

Innovation organizations must be recognized as paths to success!

General Motors • New Business Development Network is recognized for “stars.” • Much of top management has gone through the program… the operation’s “alumni” have developed a strong affinity. • A recruiting tool for top talent.

Motorola •Leadership Sourcing Initiative •Nurtures leaders… and tracks performance over time •A clear signal to the firm about what is important… •...unfortunately, it is not focused on innovation

Bring together people with different eyes, different lenses, and different voices

Cemex believes that “innovation occurs at the junction between different attitudes, outlooks, and life experiences”. Its “Innovation Board” consists of five insiders (three Cemex VPs and two young managers) and two outsiders (a supplier and a consultant).

Staff innovation teams with credible, senior people Whirlpool’s I-mentors are “innovation black belts” like Six Sigma coaches

Create multiple and diverse processes for promoting collaboration and prototyping ideas –“many tools, many homes”

Siemens Business Systems •KM officers have resources & processes for prototyping and diffusion •This can occur in the 50 units worldwide, in communities of practice, at the SBS level, or at the Siemens Corporate level

Cemex •New business incubator (Cx Networks) •Shared performance scorecard •Cross-company e-groups •Innovation Board •Innovation staff group •Platform teams •Idea Bank

Build formal and informal horizontal linkages between business units

Siemens Business Systems •KM leaders from all 15 units and Corporate meet on a regular basis •They drive cross-fertilization and best practices between Business Units

Dow Chemical •The Growth Network, an informal group •The Business Growth Network, the top executive, a structured group

Build formal and informal linkages outside the firm

Alcoa •“Alcoa Business Systems” is innovating the firm’s entire production, supply chain, development and fulfillment systems (Alcoa’s adaptation of the Toyota Production System) •Arose from a long-term, deep relationship with Toyota Corporation

Siemens •The Global Innovation Network •Defines GIN as inside and across all units, partners, researchers, governments -anyone who can contribute to Siemens’ reach and growth.

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Set time aside every year for an annual planning review toassess the current growth stage of the company and plan for the next growth stage.

Page 58: Strategic Innovation - trends, challenges and best practices

SME Leaders need to…

Set time aside every year for an annual planning review to assess the current growth stage of the company and plan for the next growth stage.

Anticipate and be prepared for the growth challenges that all companies experience rather than allowing crises to dictate events.

Change the company’s course and direction if that is what is required to meet these challenges.

Groom leadership at all levels of the company. Ensure that professional development and upgrading occurs for all managers at least once a year.

Encourage managers to step back from day-to-day operations to assess the company from a broader perspective.

Set aside resources for professional advice at critical transitions between growth stages.

Learn about best practices in organizational developmentthrough case studies and advisory groups.

Promote, communicate and manage change throughout the organization.

Open communication lines with all levels of staff to promote discussion about the evolution and growth of the company.

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Setting the Climate And ConditionsFor Sustainable, Innovative

Organisations

Setting the Climate And ConditionsFor Sustainable, Innovative

Organisations

Page 60: Strategic Innovation - trends, challenges and best practices

Making It Happen…

Cost Competitiveness

Physical & Communications

Infrastructure

Innovation &Entrepreneurship

ManagementCapability

Technology, Product &Service

DevelopmentExpertise Expertise

In Markets

World Class Skills,Education &

Training

Effective, Agile

Government

Sustainable Enterprises

AttractiveTaxationRegime

Essential Conditions

CompetitiveAdvantages

Page 61: Strategic Innovation - trends, challenges and best practices

Cost Competitiveness

A lack of effective competition policies

Excessive or inappropriate regulatory policies

An inability to promote and reward workplace productivity

Higher living costs

Direct and indirect barriers to entry to markets (for example, through restrictive state licensing schemes, or through the customs and practices engaged in by some of the self-regulated professions)

The absence of competition in the provision of economic infrastructure via statutory and other monopolies

The sheltered status enjoyed by many areas of business activity through legal protections of one kind or another

Better regulation is increasingly being used across the developed world to createcompetitive advantage in the race for investment, jobs and innovation.

While regulation is necessary and often valuable, it must be balanced against the costs to enterprise.

Regulatory compliance has a price – not only in financial terms, but also in terms of time and management attention. This can have a significant impact on small businesses.

Firms have to continually increase their productivity either by reducing input costsor by increasing output value in order to remain competitive and profitable and to pay employees real wage increases.

Productivity is in everyones interest. Increases in productivity are best realised in a work environment that is flexible, and in which the creativity, knowledge, skills and experience of the workforce are channelled and rewarded. The majority of firms lack the structures for this to happen.

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Innovation and entrepreneurship

Workplace Innovation

Innovation In The Public Sector

Innovation &Entrepreneurship

Innovation requires a particular mindset that involves curiosity, creativity and problem-solving, the ability to continually question established ways of doing things and the ability to apply knowledge, insights and intuition to change them.

It also requires a range of skills that is neither easy to teach nor learn, including people management skills, negotiation skills, problem-solving and communication skills.

Provide positive role models and promote self employment as a long-term career goal and focusing on this area in the curriculum, in transition year and in career guidance advice, with a particular emphasis on potential early school leavers

Foster positive attitudes to personal responsibility, independence, self directedlearning, initiative and risk-taking

Teach the basics of business, finance and communication at primary, secondary and higher levels of education

Give greater recognition to non-academic achievementEnsure access to entrepreneurial award schemesProvide relevant entrepreneurial training at third level, including a focus on commercialisation of academic innovations.

A number of trends are converging to change the ways in which businesses are organised, in which management and control are exercised and in which responsibilities are distributed.

Information technology: Information can be made available where and when it is needed. As a result, front-line workers are more equipped to make decisions and work independently of traditional management hierarchies

Human resources: Workers are not only skilled at a specific task, but because of education and information technology, they are versatile and creative

Changes in employee preferences: Workers now seek more variety and challenge at work than before. They also seek more flexible working arrangements, such as part-time work and tele-working

Industrial technology: Large single-purpose machines are being replaced by more flexible, multi-purpose machines. These demand a more versatile, educated and creative workforce.

Public service modernisation and efficiency remains a critical challenge for manyGovernments

To create an environment conducive to innovation within the public sector, certaininterdependent conditions need to be in place for each department and agency -

Specific and prioritised goals: Ensuring that goals are clearly defined, prioritised, communicated and understood is a basic precondition to making real progress. Without this, the ability to focus resources to best effect to achieve objectives and to respond to the needs of the organisation and its clients is substantially weakened

Empowerment of senior public servants: Public sector managers face particularchallenges in creating an innovative, efficient and responsive public service.Leaders assume a high level of personal accountability and exposure, while simultaneously resolving competing servicedemands within a resource-constrained environment. Senior managers within thepublic sector should be encouraged to achieve high levels of delivery by ensuring that they have appropriately skilled staff

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Need to invest in infrastructure ahead of demand in key centres

Need to prioritise infrastructure investment decisions based on the current and future

needs of enterprise

The management of infrastructure projects

The need to develop e-Infrastructure

Physical & Communications

Infrastructure

Weak infrastructure in regions presents a barrier to their economic development.The key mechanism for enabling regional development is to enhance theirinfrastructure. Regions will attract enterprise only if they have the infrastructure andfacilities that allow them to compete with cities and large towns and international regions for trade and investment.

Invest in infrastructure ahead of demand in key locations. Investment should beprioritised in designated gateways and hubs to enable them to achieve their regional potential. As a country moves towards a knowledge-based

economy, the relative importance of different types of infrastructure changes.

Infrastructure that supports the mobility of people ( air services, national roads) and ideas(broadband networks) increases in importance, while the relative demand for other types of infrastructure may diminish. It is important that such changing needsare reflected in investment decisions.

Many major infrastructure projects can be subject to delays and overruns in time and cost. While the development planning process is the cause of some delays, project planning, budgeting and project management appear are often inadequate In some projects, too many state bodies are involved without the required level of co-ordination.

’Advanced broadband services are an absolute necessity for the development ofknowledge-based enterprises in existing and emerging sectors, for the creation of anIT-literate society, for achieving more effective government services in areas such asHealthcare, education and R&D

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Training

Resources

ManagementCapability

Tactical Focus

’Todays business environment is becoming more challenging from a management perspective: on the one hand, the complexity of the management task is increasing, with the emergence of more sophisticated business models, greater competitive pressures and the relentless advance of technology; on the other hand, the timeframe in which managers must act and make decisions is decreasing.

Many local firms require external assistance in order to develop their management expertise particularly at the start-up and early stages of internationalisation.

SMEs generally have an overstretched management structure that is occupied with immediate, operational issues rather than more strategic ones

Clear articulation of needs: A clear prioritisation should be made identifying the most pressing needs in relation to management capability building. This should then influence the formulation and delivery of appropriate training programmes

Industry-centric: Enterprise should play a prominent role in promoting, developing, and delivering training, and disseminating best practice

Focused: The appeal and value of training to firms can be greatly enhanced if it can be set in their immediate context; the context has a sectoral aspect as well as stage of business maturity

Action-oriented: Training should emphasise practical skills that can be readilyapplied in the SME

Flexible Delivery: Courses must be available at times and locations convenient to firms

Evaluation: An on-going assessment of the benefits to individuals and firms should be an integral part of all training.

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Cost Competitiveness

Physical & Communications

Infrastructure

Innovation &Entrepreneurship

ManagementCapability

Technology, Product &Service

DevelopmentExpertise Expertise

In Markets

World Class Skills,Education &

Training

Effective, Agile

Government

Sustainable Enterprises

AttractiveTaxationRegime

Page 66: Strategic Innovation - trends, challenges and best practices

Clusters And Innovation NetworksClusters And Innovation Networks

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What’s The Difference Between A Network And A Cluster?..

Networks:• Usually have a somewhat restricted membership and a specific set of objectives

• Can often involve formal contractual arrangements

Clusters:• Have a geographic, and usually a sectoral focus

• Are open in terms of both membership and goals

– Cluster definitions need to be broad enough to include all relevant industries and institutions that have material linkages with the core activities of the cluster

– Cluster definitions need to be narrow enough to cover companies that face a common set of barriers to upgrade productivity and performance

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Achieving Competitiveness The Role of Clusters

Clusters provide the opportunity to move to a new level of private-public partnership. They can also be a test-ground for developing solutions to economy wide problems

However

Cluster initiatives alone are less effective, if they are not part of a overarching approach to improve competitiveness on the national and/or regional level

Page 69: Strategic Innovation - trends, challenges and best practices

Opportunities - Public procurement - Regulations

Enablers - Intellectual property framework- Measurement system- Standards

Advice and supportfor business - Best practice programs - Support for developing new technology - Help accessing finance - R&D tax credits - Support for inward investment - Access to global knowledge

Business Innovation

Building blocks of innovation: a supportive climateMacroeconomic stability Education and training policy Trade policyCompetition policy Physical and IT infrastructure Science policy

Ability to execute strategy Agility Products

Culture

Competence

ResourcesKnowledgeTools

Capital

Structures

People

Inside The Organisation

GovernmentRole

• A successful cluster policy builds on sound overall economic policies

• Government should support the development of all clusters, not choose among them

• Government policy should reinforce established and emerging clusters rather than attempt to create entirely new ones

• Government’s role in cluster initiatives is as facilitator and participant. The most successful cluster initiatives are a public- private partnership

Page 70: Strategic Innovation - trends, challenges and best practices

Growers/Vineyards

Wineries/ Processing Facilities

Winemaking Equipment

Barrels

CorksBottlesLabels

Food ClusterTourism Cluster

GrapestockFertilizer, Pesticides, Herbicides Irrigation TechnologyAgriculture Cluster

State Government Agencies( e.g., Select Committee on Wine Production and Economy)

Educational, Research, & Trade organizations (e.g. Wine Institute, UC Davis, Culinary Institutes)

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Clusters Increase Productivity / Efficiency – Efficient access to specialized inputs, services,

employees, information, institutions, and “public goods” (e.g. training programs)

– Ease of coordinationand transactions across firms–Rapid diffusionof best practices

– Ongoing, visible performance comparisonsand strong incentives to improve vs. local rivals

Clusters Stimulate and Enable Innovations

–Enhanced ability to perceive innovation opportunities

–Presence of multiple suppliers and institutions to assist in knowledge creation

–Ease of experimentation given locally available resources

Clusters Facilitate Commercialization – Opportunities for new companies and new lines of

established business are more apparent

– Commercializing new products and starting new companies is easier because of available skills, suppliers, etc.

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• There is often an array of clusters in

a given field in different locations, each with different levels of specialization and sophistication

• Other clusters focus on manufacturing, outsourced service functions,or play the

role of regional assembly or service centers

Firms based in the most advanced clusters often seed or enhance clusters in other locations in order to reduce the risk of a single site,access lower cost inputs, or better serve particular regional markets

The challenge for an economy is to move from isolated firms to an array of clusters, and then to upgrade the breadth and sophistication of clusters to more advanced activities

Page 73: Strategic Innovation - trends, challenges and best practices

1955 Salk Institute Founded

1960 Scripps Research Institute founded

1964 UCSD founded

1976 Burnham Institute founded

1978 Hybritech founded

1985 UCSD Connect founded

1986 Hybritech

sold to Eli Lilly

1991 Biomedical Industry Council founded

1991 Biocom founded

1992 Nanogen founded

1998 Novartis Agricultural Discovery Institute founded

The Process of Cluster Development

History of the San Diego Biotech / Pharma Cluster

Page 74: Strategic Innovation - trends, challenges and best practices

1930First oenology course at Roseworthy Agricultural College

1955Australian Wine Research Institute founded

1965Australian Wine Bureau established

1980 Australian Wine and Brandy Corporation

established

1990Winemaker’s Federation Australia established

New organizations created for education, research, market information, and export promotion

1970Winemaking school at Charles Sturt University founded

1950s Import of European winery technology

1960s Recruiting of

experienced foreign investors, e.g. Wolf Bass

1970s Continued inflow of foreign capital and

management

1980s Creation of large number of new

wineries

1990s Surge in exports and

international acquisitions

The Australian Wine Cluster History

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InternalCompetitive advantage resides solely inside a company or in its industry

Competitive success depends primarily on company choices

External

Competitive advantage resides partly in the locations at which a company’s business units are based

Cluster participation is an important contributor to company success

Sources of Firm Success

Page 79: Strategic Innovation - trends, challenges and best practices

Innovation

Productivity

Prosperity

•Innovation is vital for long-term increases in productivity •Innovation is more than just scientific discovery•There are no low-tech industries, only low-tech firms

Page 80: Strategic Innovation - trends, challenges and best practices

Productivity, Innovation, and the Business Environment

Productivity, Innovation, and the Business Environment

Sophisticated and demanding local customer(s)

Local customer needs that anticipate those elsewhere

Unusual local demand in specialized segmentsthat can be served nationally and globally

Access to capable, locally based suppliers and firms in related fields

Presence of clusters instead of isolated industries

A local context and rules that encourage investment and sustained upgrading–e.g., Intellectual property protection

Open and vigorous competition among locally based rivals

Meritocratic incentive systemsacross institutions

Presence of high quality, specialized inputs available to firms:– Human resources– Capital resources– Physical infrastructure– Administrative infrastructure– Information infrastructure– Scientific and technological infrastructure– Natural resources

Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing

Page 81: Strategic Innovation - trends, challenges and best practices

Clusters and Competitiveness

Clusters Increase Productivity / Efficiency

Efficient access to specialized inputs, services, employees, information, institutions, and “public goods” (e.g. training programs)

Ease of coordination and transactions across firms

Rapid diffusion of best practices

Ongoing, visible performance comparisons and strong incentives to improve vs. local rivals

Clusters Stimulate and Enable Innovations–Enhanced ability to perceive innovation opportunities

–Presence of multiple suppliers and institutions to assist in knowledge creation

–Ease of experimentation given locally available resources

Clusters Facilitate Commercialization

–Opportunities for new companies and new lines of established business are more apparent

–Commercializing new products and starting new companies is easier because of available skills, suppliers, etc.

Page 82: Strategic Innovation - trends, challenges and best practices

• A new way of thinking about an economy and organizing economic development efforts

Better aligned with the nature of competition and sources of competitive advantage. Clusters capture important linkagesin terms of technology, skills, information, marketing and customer needs that cut across firms and industries. Such linkages are fundamental to competition and, especially, to the direction and pace of innovation

Recast the role of the private sector, government, trade associations and educational or research institutions

Brings together firms of all sizes

Creates a forum for constructive business-government dialogue

A means to identify common opportunities, not just common problems

Goal

Goal

Goal

Goal

Objectives – Cluster initiatives need to have a defined hierarchy of measurable goals, from activities to intermediate goals to ultimate goals –The focus of the initiative should be on increasing productivity, not on increasing the size of the cluster

Activities –All activities need to be considered that can increase the potential for productivity and productivity growth, not only financial incentives –Data-driven analysis should be used extensively to allow a more rational discussion about threats and opportunities for the cluster –The analysis should be used to identify priorities for action, not to rank the cluster for marketing purposes

Page 83: Strategic Innovation - trends, challenges and best practices

Only sustained, private sector-led cluster initiatives can be sufficiently specific and persistent in their activities to achieve real improvements in cluster performance

Leadership by a committed individual is need to keep momentum and integrate individual constituencies into a common upgrading process

Independent institutional structures are often helpful to sustain momentum over time; universities and cluster organizations can be useful to play this role

The integration of a cluster effort in a broader regional competitiveness initiative increases its impact

All relevant parts of public administration and the legislature need to be involved to insure broad backing and quick implementation of recommendations

Page 84: Strategic Innovation - trends, challenges and best practices

$

$

Different Approaches to Cluster Development -Cluster Creation

• Targets areas of perceived market demand

• Is driven by public sector intervention

• Requires sustained financial commitment by the public sector

•High failure rate

Page 85: Strategic Innovation - trends, challenges and best practices

Cluster Activation

Leverages existing assets, history, and geographic location Builds on coalition of private and public sector actors

Requires sustained participation by all actors

Level of success is increasing over time; quick returns are possible

Page 86: Strategic Innovation - trends, challenges and best practices

Institutions for Collaboration

ChambersOf

Commerce

UniversityPartnerGroups

Professional Associations

School Networks

Advisory Councils

Competitiveness Councils General

Industry associations

Specialized professional associations and societies

Alumni groups of core cluster companies

Incubators

Institutions for collaboration (IFC) are formal and informal organizations that:

-facilitate the exchange of information and technology -conduct joint activities -foster coordination among firms

•IFCs can improve the business environment by:

- creating relationships and level of trust that make them more effective - defining of common standards - conducting or facilitating the organization of collective action in areas such as procurement, information gathering, or international marketing - defining and communicating common beliefs and attitudes - providing mechanisms to develop a common economic or cluster agenda

Page 87: Strategic Innovation - trends, challenges and best practices

FinancialInstitutions Companies

ResearchInstitutions

Government

Institutions forcollaboration

Eliminate barriers to local competition

Focus efforts to attract foreign investment around clusters

Focus export promotion around clusters

Organize relevant government departments around clusters

Create streamlined, pro-innovation regulatory standards affecting the cluster to-reduce regulatory uncertainty-stimulate early adoption-encourage innovation or new products and processes

Sponsor independent testing, product certification, and rating services for cluster products/services

Act as sophisticated buyer of the cluster’s products / services

Create specialized education and training programs

Establish local university research efforts in cluster-related technologies

Support cluster-specific information gathering and compilation

Improve specialized transportation, communications, and other infrastructure required by cluster

Companies need to…Take an active role in upgrading the local infrastructure

Nurture local suppliers and attract new supplier investments

Work closely with local educational and research institutions to upgrade quality and create specialized programs addressing cluster needs

Provide government with information and substantive input on regulatory issues and constraints bearing on cluster development Focus corporate philanthropy on enhancing the local business environment

Page 88: Strategic Innovation - trends, challenges and best practices

Private Sector Influences on Cluster UpgradingFirm Strategy And Rivalry

Market jointly through trade fairs and delegations

Collaborate with government export promotion efforts

Create directories of cluster participants

Demand Conditions

Work with government to streamline regulations and modify them to encourage innovation

Establish local testing and standards organizationsRelated and Supporting Industries

Establish a cluster-based trade association

Encourage local supplier formation and attract local investments by suppliers based elsewhere through individual and collective efforts

Input Conditions

Jointly develop specialized vocational, technical, college and university curricula

Sponsor specialized university research centers

Collect cluster information through trade associations

Maintain close liaison with infrastructure providers to address specialized cluster needs (e.g., data communications, logistics)

Develop courses for managers on regulatory, quality, and managerial issues

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Building And Managing Alliances Building And Managing Alliances

Page 90: Strategic Innovation - trends, challenges and best practices

Partner

Partner

Partner

Partner

Partner

Extended Enterprise

• We have to do it ourselves• Product driven capabilities• Investment in production assets• Competing for end customer

• “We have to be in the centre of a winning network”• Solutions driven capabilities• Investment in knowledge networks• Solution and relationship excellence mindset• Competing for relationships

Industrial Enterprise

Towards The Extended Enterprise…

The time has come for a redefinition of an organisation around its core competencies and strategic, long-term, results-oriented relationships with specialised service providers

The time has come for a redefinition of an organisation around its core competencies and strategic, long-term, results-oriented relationships with specialised service providers

Page 91: Strategic Innovation - trends, challenges and best practices

FlexibilityFlexibility

Improved communication

and people mgmt

Improved communication

and people mgmt

Skill sharing and

maximisation

Skill sharing and

maximisation

Innovation facilitation

Innovation facilitation

Shared risks and rewards

Shared risks and rewards

Reduces servant/master

relationship

Reduces servant/master

relationship

Ties into a shared

vision

Ties into a shared

vision

Collaboration on strategic asset mgmt

planning

Collaboration on strategic asset mgmt

planning

Close Relationship

Close RelationshipPartnerPartner

Alliance

Trust and flexibility leads to better quality and better value for money

Trust and flexibility leads to better quality and better value for money

Reasons Quoted For Pursuing Close Outsourcing Relationships

Reasons Quoted For Pursuing Close Outsourcing Relationships

Page 92: Strategic Innovation - trends, challenges and best practices

Business Life Cycle Phases Influence Alliance Imperatives

RAPID GROWTH

• Develop Standards• External Value Proposition• Market/Customer Reach• Branding

STABILITY

• Co-operation• Stabilize Competition• Reduce Cost

EARLY GROWTH

• R&D• Gain Credibility• Access Capital

ProductInnovation

• External Value Proposition• Market/Customer Reach

CONSOLIDATION

Process Innovation

INNOVATE/ SUSTAIN/ DECLINE

• R&D

PotentialProductInnovation

ALLIANCEIMPERATIVES?

Page 93: Strategic Innovation - trends, challenges and best practices

Need for AdditionalCapabilities

Need toInvolvePeersSTRUCTURE OF LEADERSHIP

PORTFOLIO(e.g., Time Warner, AT&T)

CONSTELLATION(e.g., Mondex, Excite@Home)

FRANCHISEe.g., McDonald's, Nintendo)

COOPERATIVE(e.g., VISA, TriStar)

SINGLE ENTITY COALITION

SEVERAL(Multiple

Gaps)

ONE(Single Gap)

NUMBER OFALLIANCEROLES

Alliance Architecture ModelsMultiple interdependentalliances led by two or morecomparably sized peers

Multiple class alliances managed as portfolio by one firm

Alliances between manycomparably sized peers

Alliance between firm and one discrete class of partners

Page 94: Strategic Innovation - trends, challenges and best practices

Acclaim Entertainment Inc./LJNToys Ltd.Accolade, Inc.Activision, Inc.Advanced GravisAdvanced Productions, Inc.American Sammy Corp.American Softworks Corp.American Technos, Inc.Ascii Entertainment Inc./NexoftAtlus Software, Inc.Bandai America, Inc./ShinseiBMG EntertainmentCapcomDisney InteractiveEidos IneractiveElectro Brain Corp.Electronic Arts/EA SportsFox InteractiveGametek, Inc./Cybersoft, Inc.GT Interactive SoftwareGTE Interactive MediaHot-B USA Inc.

I MotionIMNInteract Accessories Inc.Interplay ProductionsJaleco USA, Inc.JVC Musical Industries, Inc.Kemco of America, Inc.Koei CorporationKonami Inc./Ultra SoftLaral GroupLeft Field EntertainmentLife FitnessLight Wave TechnologiesMajesco Sales, Inc.Microprose Software, Inc.Midway Home EntertainmentMilton BradleyMindscape/Software ToolworksNamco Hometek, Inc.Natsume Inc.Nuby/CurtisOcean of America, Inc.Parker BrothersPhilips Media

Playmates Interactive Ent.Psygnosis, LimitedRare Ltd.Raya Systems, Inc.Seta USA, Inc.Sharp Electronics Corp.Sports Sciences, Inc.Sun Corporation of America(Sunsoft)Take-Two InteractiveSoftware, Inc.TecMagik, Inc.Tecmo Inc.T*HQ/Malibu Games/BlackPearl SoftwareTitus Software Corp.Toho Co., Ltd.TycoUbi Soft Inc.Viacom New MediaVic Tokai Inc.Video SystemVirgin InteractiveEntertainment, Inc.

Franchise Model: Deep Bench Strength—

This model is used by companies to fill a single critical gap in its value chain.

The Franchise Model develops a single alliance role that can be refined and quickly replicated to create scale, thereby producing an alliance growth corridor forthe alliance initiator.

Page 95: Strategic Innovation - trends, challenges and best practices

END USER DEVICES AND APPLICATIONS

Silicon GraphicsIBM

Apple

Atari CorpElectronic Arts

Matsushita 3OOIllachu

ToshibaAT&T

CONTENT

TCITurner Broadcasting

Atari Games

CrystalDynamics

Time Warner

SOFTWARE DEVELOPERS

Microsoft Accolade

Digital Solutions

Hyperbole

Compuserv

LOCAL SWITCHING AND TRANSPORT

TCG

Cox

TCI

Comcast

Cont Cablevision US West

Newhouse

GE

Cont Cablevision

Primestar

TCI

Cox

Qualcomm

SERVICE CREATION

TCI

Spiegel

Sega

Philips

WhittleComm

QVC

Comcast

Catalog 1

Sega Channel

TCI/Liberty

Hardware

Central

Software

Distribution

JointVenture

Portfolio Model: Hub and Spoke —

The portfolio model is a major step up from the franchiseapproach. Companies that adopt this approach are findingthat the value-added chain contains far too many elements for it to command all the capabilitiesnecessary to compete.

However, instead of forming a number of single discretearrangements to fill each gap (thus making itself vulnerable should a partner experience difficultyor if the market changes rapidly), the company decidesto create multiple class alliances managed as a portfolio.

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Creative Art

Production

Theater Distribution

Consumer Promotion

Cable Marketing/Access

Video Distribution

Broadcasting

Consumer Access

HBO Columbia CBS AllianceCooperation Model - Tristar

+ + =

+ + =

+ + =

+ + =

+ + =

+ + =

+ + =

+ + =

OBSERVATIONS• All capabilities already existed within the individual partners—sharing alone created value• Improved production asset effectiveness of Columbia• Realized maximum value for entertainment /movie archive for all parties• Improved audience and reach, driving advertising revenues

OBSERVATIONS• All capabilities already existed within the individual partners—sharing alone created value• Improved production asset effectiveness of Columbia• Realized maximum value for entertainment /movie archive for all parties• Improved audience and reach, driving advertising revenues

Cooperative Model: MutualBenefit — With the cooperative model, one moves from a centralposition to more of a cooperative role. The alliance is at the center,rather than one of the partners, and the customer relationshipoften shifts from the company to the alliance. Typically, we findthat companies that have adopted the cooperative model do so tooutflank the competition and substantially raise the competitive bar

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Harbinger

BAAN

NetscapeCommerce 1

AT&TSAPGEIS

Ariba

Clarus

PeopleSoft; Oracle

PeopleSoft; Oracle

PeopleSoft; Oracle

MS

MS; Market FirstCommerce 1

MS

TopTier; Extricity

OracleBAANSAP

OracleBAANSAP

OracleBAANSAP

SAPDGUnisysPeachtreeOracle

SAPDGUnisysOracleMS

Unisys

Deloitte ArisArthur AndersenEggrockPRT Grp

Deloitte

AMEX VelforeOpen MarketSterling VISAFedEx

PwCHP IntelStaples

HP

HP

HP; OpenMarket iCat

E-Procurement Alliance Portfolios—Ripe for Evolution to Constellations

SAPMCI/WMSSabreBrit Telecom

SAPMCI/WMSSabre

CompetitorLearning &Innovation

Core Component Supplier

ImplementationServices

Resellers

Industry Influencers

Companies that utilize constellations develop breakout strategies that leapfrog the competition and put industry competitors on the defensive.

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STRUCTURE OF LEADERSHIP

PORTFOLIO CONSTELLATION

FRANCHISE COOPERATIVE

SINGLE ENTITY COALITION

SEVERAL(Multiple

Gaps)

ONE(Single Gap)

NUMBER OFALLIANCEROLES

Alliance Architecture ModelsThe biggest advantage tothe franchise and portfolio modelsis that the forming companysits in the control position directingand managing the interconnectednessof the arrangements

The cooperative model requires a different business model. While the relative size ofthe partners may differ, they are equals at the point of intersection (the specific product or service provided to the marketplace). All companies are working toward the same goal; however the dayto-day running is not under direct control of any one partner.

Page 99: Strategic Innovation - trends, challenges and best practices

Each Alliance Class Has a Unique Set of Characteristics….

PORTFOLIO CONSTELLATION FRANCHISE COOPERATIVE

Easiest(Operationally Managed)

Little(Fill Single Gap)

Single(Concentrate on Current Customer /Market Segments)

Governance

Integrated Offerings

Industry Focus

Easier – Internal(Oversight CommitteeCrosses Various Areas)

Little(Multiple Gap Focus)

Single(Concentrate on CurrentCustomer /Market Segments)

Intricate – External(Shared LeadershipShared Governance)

High(Create New ValuePropositionWithin Industry)

Multiple(Concentrate on Creating New Value Position to Extend Reach into Customer /Market Segments)

Difficult – External(Shared GovernanceCrossesIndustry Boundaries)

High(Leapfrogs CurrentCompetitiveStructure)

Multiple(Rapid Expansioninto New High Growthand High Value Market Areas Unobtainable Before)

Successful companies in the next decade will be the ones that harness the full potential of the alliance models and tailor their organizational structures totake full advantage of the alliance situation which most appropriately fits theirstrategic needs

The world will be difficult to navigate and competitors too ingenious ascompanies are shaken loose from traditional ways of doing business.

Companies must develop “coherence” among the many seemingly disparate and far-flung pieces of the business, establish a potent binding force and sense of direction where all the pieces mutually reinforce each other, as well as provide a platform for growth.

One of the staggering failures of the old and dysfunctional “command and control” business model is that it “chokes” the potential of the company.

The successful company of tomorrow will develop coherence between the control model and the cooperative model of alliances

Page 100: Strategic Innovation - trends, challenges and best practices

CEOCEO

LegalAudit

FinanceGovernance

Operations

BU

O

ptim

isat

ion

Portfolio M

aximisation

Strategy

Mergers & Acquisitions

Integration &Implementations

StrategicSourcing

EnhancingOperational Capabilities

SharedResources

SharedFunding

JointEquity

Constellations

Paradigm Shift

Maj

or In

crea

se

In V

alue

Pilots & R&DProjects

Extending

Asset Reach

Joint Partnership

Boards

Board OfDirectors

Cooperative ModelControl Model

Franchise alliances are operational in nature, an extension of a specific part of a company and that’s where and how it should be managed.

The portfolio model is, de facto, a new business model.Since it usually involves more than one primary part of the dominantpartner, it is managed not by an operations group but by a businesscenter. That center acts as the “corporate center” for thealliances. It must treat its partners as a business unit within aCenterless Corporation

The cooperative model is a shared business model that needsits own leadership, but with few “owners,” they need to workthrough some cooperative governance structure. The challengewith these models is to establish a set of operating/performanceparameters. This model is very similar to what firms do whenthey establish a shared services organization within the corporation,or rely on an outsourcing agreement.

Page 101: Strategic Innovation - trends, challenges and best practices

StrategicConsistency Staff Resource

Management

Governance/ Decision Making

Functional Capability

LegalAgreement

Roles, Organisation,

Teamwork

SupportiveInfrastructure

BusinessProcesses

Communication& Info Sharing

ConflictResolution

Equity

CulturalCompatibility

Trust

Attitudes &Commitment

Culture

Management

WorkProcesses

But There Are Important Alliance Building And Alliance Management Competencies That Need To Be Developed….

Page 102: Strategic Innovation - trends, challenges and best practices

Operations Related

• Does it have a direct impact on our license to operate or on our production, yield or reliability?

• Does it require specific understanding of operational processes?

• Does the activity have a direct impact on products, quality, yield or safety?

• Will we have the ongoing capital to maintain the required knowledge and skills?

• Is the activity critical to achieving our business plan?

Knowledge Related

• Does the task require industry or process knowledge specific to our

products?

• Is the knowledge readily available

within the manufacturing community?

• Is the knowledge readily gained?

• Does the activity require or generate specific intellectual property?

• Can we maintain the required skills and knowledge?

• Does the activity require product specific equipment knowledge?

Skills Related

• If we do not own the skills and knowledge to carry out the activity, could we manage the risk

of outsourcing it?

• Does the task require continual review to stay abreast of technology and methods that could improve outputs of the process?

• Do we have the skills to manage the suppliers or alliance partner?

Decisions On What is Core And Non-Core?....The Key Questions

Strategic Priority And Risk

Strategic Priority And Risk

Internal versus External

Capabilities

Internal versus External

Capabilities

Economic Valuation

Economic Valuation

Ability To Manage Supplier

Ability To Manage Supplier

Cheaper to keep in house

Lack skills tomanage risks

In-house capabilities are superior

No existing options for external provision

Suitable providers exist

Providers have equal/superior skills

Most cost effective to outsource

Keep Activity In House And Develop Capabilities

Outsource

Page 103: Strategic Innovation - trends, challenges and best practices

Joint Business Planning

2004 2005 2006

2004 2005 2006

Turnaround Strategies

Equipment Strategies

Detailed discussions about productplanning, projects, technology change

Collaborative Innovation

Process and equipment best practicejoint client/alliance teams work closelytogether on continuous improvement programs

Open Book Accounting

Profit

Partners clearly communicate profit margins and financial breakdown

Right Of First Refusal

Client Partner

Other Suppliers

Strategic suppliers receive right of first refusal to respond to specific projects before clientapproaches other suppliers.

Sustaining Strategic Relationships by Sponsoring a Wide Range of Collaborative Initiatives

Page 104: Strategic Innovation - trends, challenges and best practices

• Reinvent each time• No knowledge capture• No best practices

• In-house “guru” – best practices individually based• Little knowledge-sharing• Limited resources

• Formalization of procedures• Dedicated staff – high degree of sharing• Establishment of knowledge repository for future use

LONE RANGER

AD HOC

Alliancing - Pyramid Of Capability

INSTITUTIONAL

Page 105: Strategic Innovation - trends, challenges and best practices

Anatomy Of World Class Alliance Management…..

So, What Does It Take?

Enterprise Alignment

Strategy Alignment

Financial Impact

Execution Effectiveness

Speed

Efficiency

Cost

Employee Development

Skills

Retention

Training Asset Management

Capacity Utilisation

Outsourcing Cost ofComplexity

ProductivityImprovement

Continuous Improvement

BestPractices

CompetitiveBenchmarking

Performance Measurement

Internal Benchmarkng

CascadingMetrics

Incentives

Customer Responsiveness

Voice Of Customer

CustomerTouch

Demand Planning

Supply/DemandAlignment

ResourceAccount-ability

LONE RANGER

AD HOC

INSTITUTIONAL

Page 106: Strategic Innovation - trends, challenges and best practices

As companies increase alliance activity, partnership responsibility spreads toemployees throughout the organisation, challenging corporations to developorganization-wide alliance capabilities. Companies that successfully build suchcapabilities enjoy a favorable impact on market capitalisation and benefit from the“virtuous cycle” of being able to attract (and learn from) quality alliance partners.

To help employees throughout the organisation build partnering capabilities, many alliance-active companies have created dedicated alliance groups with a mandate to institutionalise alliance skills. The focus of such efforts is to leverage existing pockets of expertise and standardise approaches to partnering activities.

Page 107: Strategic Innovation - trends, challenges and best practices

From First Base To True Alliance Synergy…The Journey

TIME

1

Costs savings of at least 10%

2

The creation of trust and flexibility

5

Sharing of strategic mgmt and creation of extra- preneurship

3

Creating a culture of joint partnership through alliancing

4

Joint development of strong data mgmt and best in class visions

The most successful alliancecompanies have learned that disciplined approaches and channels are needed todisseminate best-practice knowledgeand experience

Page 108: Strategic Innovation - trends, challenges and best practices

A “one-stop shop” of alliance resources integrates the alliance toolkit’s contents into one interface.

A single point of entry to all alliance resources eliminates the administrative burden of searching multiple venues for diagnostic tools, training information, off-the-shelf presentations and key contacts.

Rapidly Emerging, Powerful Alliance Knowledge Management Tools

Page 109: Strategic Innovation - trends, challenges and best practices

Are You Capturing And Using Alliance Best Practices?..

IMPACT AND RATIONALE INCLUDES:

• Improves communication across all business & functional units

• Deepens alliance knowledge within company & accelerates learning curve

• Accelerated pace of innovation & response time

Alliance Knowledge Management

Alliance Best Practices

Contact Database

Process Support Tools

DecisionSupportTools

Alliance Scorecard Click here

Alliance Databases

Networks

Financials

Links

Alliance Health Check

Org ChartsRelationship MapsRoles/Accountabilities

Equipment StrategiesProject ManagementWork ManagementWork FlowProject Budgeting

Training & Performance

Business Planning

Principles & Leadership

Management Of Change

Continuous Improvement

Turnaround Planning

Projects

Equipment

Root Cause Analysis Tool Set Process Maps & Drawings Active Improvement Teams

Project Reports & Documents Prototyping Technology Enablers

Importance

Performance

Hi

Low

HiLow

Relationship Health Audit

12

3

45

Relationship Issues Log Relationship GovernanceOrganisation Charts Network & Influence Maps

FunctionalClick here

Site/LocationClick here

DivisionalClick here

Key Influencer

Budget Gatekeeper

Projects High Flyer

Roles & Accountabilities

R A C I

Alliance Scorecard

Financial Measures Operations Measures

Relationship Measures

Score Target Variance Score Target Variance

Score Target Variance Score Target Variance

Satisfaction Index

Alliance StaffTurnover

Best PracticeSharing effectiveness

Innovation Measures

# process improvements

Knowledge transfer frequency

Mechanical Availability

MTBR

Scheduled WorkCompleted

MaintenanceCosts Trend

Maintenance Spend

Cost Of Unreliability

Page 110: Strategic Innovation - trends, challenges and best practices

Outsourcing And OffshoringOutsourcing And Offshoring

• Global competition suggests a drastically shortened life cycle for most products, and it no longer permits companies a polycentric, country-by-country approach to international business.

• An increasing number of countries are competing head-on for global leadership.

• In today’s competitive world, technology diffuses quickly.

Page 111: Strategic Innovation - trends, challenges and best practices

• BPO (Business Process Outsourcing) is the delegation of one or more IT-intensive business processes to an external provider who, in turn, owns, administrates and manages the selected process(es), based upon defined and measurable performance metrics

• Business Process Offshoring: Business process offshoring is the transfer of business tasks (medical transcription) or business processes (call centers) to a low-cost country like India

• ITES - Information Technology Enabled Services which encompasses both BPO and Call Centers

• BPM - Business Process Management - is the practice of improving the efficiency and effectiveness by automating the business process

• BPR - Business Process Reengineering - Critical reexamination, rethinking, redesigning and implementing the redesigned process of organization

• Business Transformation Outsourcing: Business transformation outsourcing (BTO) is a natural extension of the more tactical BPO model and involves the transfer of responsibility for all back-office functions, as well as a comprehensive business change management process to an external vendor. The objective is to maximize the long-term benefits of the BPO operations, resulting in a comprehensive business transformation (or overhaul).

BPO: Terminology

Page 112: Strategic Innovation - trends, challenges and best practices

What? Where? How?

Areoperations

best in class?

What categories

to evaluate?

StrategyStrategy

Maintain/ leverage

Yes

Is this a core

competency?

NoCaptive

Joint venture

Third party

Wherecan you get

best in-class?

Re-engineer process

Yes

No

Onshore

Offshore

Saving on cost alone or making it best in class?

Page 113: Strategic Innovation - trends, challenges and best practices

7%

25%

13%

55%

6%

22%

12%

60%

4%

22%

11%

63%

0%

20%

40%

60%

80%

100%

1980 1990 1999

Services

Other industry

Manufacturing

Agriculture

Global GDP continues to shift from manufacturing and industry to services

Page 114: Strategic Innovation - trends, challenges and best practices

Source: Gartner

Worldwide BPO spend

ROW*

Europe

North

America

2002

100% = $108bn

56.4%

22.6%

21%

$25 bn

$23 bn

$62 bn

100% = $173bn

2007

56%

23%

21%

$39 bn

$37 bn

$97 bn

ROW*

Europe

North

America

CAGR – 9.5%

CAGR – 9.6%

CAGR – 9.3%

The 100+bn global outsourcing market will grow at CAGR of > 9%

Page 115: Strategic Innovation - trends, challenges and best practices

Source: Gartner

2007

100% = $173bn

$62 bn

$39 bn

$37 bn

$97 bn

Europe

North

America

ROW*

Global needs for competencies and domain knowledge

Opportunity for leveraging capabilities from remote location

Customer InteractionServices ($15B)

HR ($23B)

All vertical(only Txn.

Processing)

($24B)

Finance & accounting($8B)

Payment Services

($11B)

Supply management

(Procurement, warehouse,

inv. mgmt., etc.)

($10b)

Administrative processes(Asset mgmt., document mgmt.,

real estate. mgmt., etc.)

($6B)

15.4

23.2

8.56.4

11.5

10.5

24.2

Customer InteractionServices ($2.35B)

HR ($7.47B)

All vertical(only Txn.

processing)

($7.45B)

Finance & accounting

($4.33B)

Payment Services($2.37B)

Supply management(Procurement, warehouse,

inv. mgmt., etc.)

($13.33b)

Administrative processes(Asset mgmt., document mgmt.,

real estate. mgmt., etc.)

($1.9B)

15.4

23.2

8.5

6.4

11.5

10.5

24.2

Page 116: Strategic Innovation - trends, challenges and best practices

The Fortune 1,000s’ offshore evolution, 2003-2008

Page 117: Strategic Innovation - trends, challenges and best practices

What elements should not be outsourced?- Core competencies- functions that cannot be performed by a third party with equivalent performance

What elements cannot be outsourced?- untouchables- physical infrastructure- regulations compliance

What elements have significant roadblocks?- work in progress (active projects, upgrades, conversions)- Lifecycle management- High firm risk- Specialised technical or business knowledge- contractual obligations

Outsourcing Opportunities

Opportunity Filter

Page 118: Strategic Innovation - trends, challenges and best practices

Opportunity Filter

Cost reduction

Make fixed cost variable

Liberate Capital

Integrate parts from M&A

Improved competitiveness

Focus on core competency

Create new process

Access to skills and technology

Outsourcing Drivers

Page 119: Strategic Innovation - trends, challenges and best practices

Getting It RightGetting It Wrong

Opportunity FilterOutsourcing ProcessConsiderations

• Delegate outsourcing decision

• Lengthen the decision process

• Fail to communicate regularly with affected employees

• Limit vendor access to technical and financial data

• Expect unrealistic savings

• Fail to share outsourcing decision criteria

• Get senior management involvement and sponsorship

• State clear objectives for the outsourcing value proposition

• Jointly develop the outsourcing solution

• Consider culture match of

companies

• Develop a well conceived HR plan

• Strive for a "Win / Win" business alliance

Page 120: Strategic Innovation - trends, challenges and best practices

Opportunity FilterPossible Hidden Costs

• Searching and Vetting Vendors

• Due Diligence• Documenting requirements, • Sending out RFP’s • Evaluating the responses• Travel for site visit(s)

• Work Transition• Training period - TTT

• Human Capital - Severance and retention bonuses

•Cultural Issues / - Communication issues• Process Maturity / Standardization• Project and Contract Management

• Anticipate resources needed to oversee provider

Page 121: Strategic Innovation - trends, challenges and best practices

Potential Benefits

Implement common

systems

Automate manual

processes

5-10%

5-10%

Achieve economies

of scale

Assign work to right level

Reorganize

the work

Streamline remaining

work

Eliminate work steps

5-10%

0 - 5%

0 - 5%

0 - 5%

5%

TechnologyTechnology

Organisation

ProcessOptimize labor rates or location

25 – 30%

Page 122: Strategic Innovation - trends, challenges and best practices

Implement common

systems

Automate manual

processes

5-10%

5-10%

Achieve economies

of scale

Assign work to right level

Reorganize

the work

Streamline remaining

work

Eliminate work steps

5-10%

0 - 5%

0 - 5%

0 - 5%

5%

TechnologyTechnology

Organisation

ProcessOptimize labor rates or location

25 – 30% Implement

common

systems

Automate manual

processes

5-10%

5-10%

Achieve economies

of scale

Assign work to right level

Reorganize

the work

Streamline remaining

work

Eliminate work steps

5-10%

0 - 5%

0 - 5%

0 - 5%

5%

TechnologyTechnology

Organisation

ProcessOptimize labor rates or location

25 – 30%

Although outsourcing can improve the cost effectiveness, quality, and timeliness of many HR activities…

…ineffective relationship management can reduce returns by as much as 75 percent

Total Potential

Value Gained

fromthe

OutsourcingRelationship

Total Potential

Value Gained

fromthe

OutsourcingRelationship

100%

EffortsDuplicated Resources

Wasted ProblemsNot

Managed

PerformanceNot at

ExpectedLevels

VendorsDeployedAgainst

Conflictingor Wrong

Goals OpportunitiesUntapped

OperationalChallenges

PerformanceChallenges

Portfolio MgtChallenges

“Net” ValueGained

“Net” ValueGained

Page 123: Strategic Innovation - trends, challenges and best practices

Opportunity FilterPossible CausesOf Failure

Poor orDamaged

Relationship

Poor Strategyand Business

Planning

Bad Legaland Financial

TermsSource – Vantage Partners

30%

64%

6%

“We are still waiting for the transformation to occur”

“We are spending all of our time dealing with disputes”

“Our service levels are being met, but we don’t like the service”

“Our integration responsibilities are more than we bargained for”

“We have a poor relationship with the supplier”

Page 124: Strategic Innovation - trends, challenges and best practices

Value Chain

Five steps are involved in developing a global sourcing strategy

1. Identify the separable links in the company’s value chain

2. In the context of those links, determine the location of the company’s competitive advantages (considering both economies of scale and scope).

3. Ascertain the level of transaction costs between the links in the value chain and select the lowest cost mode.

$ $ $

4. Determine the comparative advantage of countries relative to each link in the value chain and to the relevant transaction costs.

5. Develop adequate flexibility in corporate decision making and organizational design so as to permit the company to respond to changes in both its comparative advantages and the comparative advantages of other countries.

Page 125: Strategic Innovation - trends, challenges and best practices

Value Drivers and Performance Metrics Analyses

Value Drivers and Performance Metrics Analyses

ProposalSolicitation

ProposalSolicitation

RFP Development

(including contract language)

RFP Development

(including contract language)

Establishment of a Vendor

Selection Team

Establishment of a Vendor

Selection Team

Service Delivery Specification Development

Service Delivery Specification Development

Contract Administration

Contract Administration

Problem Resolution

Problem ResolutionIntegrationIntegrationCustomer

Satisfaction

CustomerSatisfaction

ContractNegotiation

ContractNegotiation

Vendor Assessment and

Selection

Vendor Assessment and

Selection

ProposalEvaluation

ProposalEvaluation

Implementationand Transition

Implementationand Transition

Performance Monitoring

Performance Monitoring

Service Delivery Requirements

Definition

Service Delivery Requirements

Definition

Outsourcing Candidate

Identification

Outsourcing Candidate

Identification

Outsourcing Applicability

Analysis

Outsourcing Applicability

Analysis

Vendor Due Diligence and Qualification

Vendor Due Diligence and Qualification

Outsourcing Candidate Screening

Outsourcing Candidate Screening

A vendor management framework that includes the following processes

Page 126: Strategic Innovation - trends, challenges and best practices

Service GapService Gap Strategic ReasonsStrategic Reasons Economic ReasonsEconomic Reasons

Business focus

Core competency

Competitive advantage

Business focus

Core competency

Competitive advantage

Changing economics or cost structure of the business or industry

Benchmarking

Unsolicited bid

Asset reduction

Changing economics or cost structure of the business or industry

Benchmarking

Unsolicited bid

Asset reduction

Triggers

IdentifyInternalCapabilitiesAnd Services

AnalyzeCustomerNeeds

IdentifyOutsourcingCandidates

IdentifyOutsourcingCandidates

Phase I:CandidateIdentification

Phase II:Outsourcing Analysis

Phase III:Implementation

YesScreenOutsourcingCandidates

ScreenOutsourcingCandidates

ConductOutsourcingAnalysis

ConductOutsourcingAnalysis

ManageOutsourcingArrangements

ManageOutsourcingArrangements

MakeOutsourcing

Decision

MakeOutsourcing

Decision

StrategicVulnerability

CustomerImpact

EconomicImpact

Would outsourcing burden us with unmanageable business risks?

Would outsourcing have an unacceptable impact on our customers?

ConductOutsourcingArrangements

Are the benefits of outsourcing likely to be attractive?

Retain Work In-House

No No

Yes Yes

Yes

No

RiskAssessment

RiskAssessment

ReversibilityAnalysis

ReversibilityAnalysis

Service LevelAssessment

Service LevelAssessment

VendorAnalysisVendor

Analysis

EconomicAssessmentEconomic

AssessmentOutsourcingDecision

And VendorSelection

OutsourcingDecision

And VendorSelection

No

Retain In-HouseAnd ContinueOptimising

Retain In-HouseAnd ContinueOptimising

TransitionConversion Plan

TransitionConversion Plan

Change Management

Change Management

Ongoing Management

Ongoing Management

Communication Strategy

Communication Strategy

Obtain customer buy-in

Solicit customer involvement

Define clear requirements for vendors

Transfer equipment, processes, and people

Obtain customer buy-in

Solicit customer involvement

Define clear requirements for vendors

Transfer equipment, processes, and people

Address organization impact on:

People Process Structure Rewards Strategy

Devise a change management plan

Address organization impact on:

People Process Structure Rewards Strategy

Devise a change management plan

Customer interface with vendor personnel and management

Customer’s management of vendor/contract

Partnering Post review of

process

Customer interface with vendor personnel and management

Customer’s management of vendor/contract

Partnering Post review of

process

Communicate, communicate

Management Customers Vendor Employees Joint venture

partners Regulatory

bodies and governments, as necessary

Communicate, communicate

Management Customers Vendor Employees Joint venture

partners Regulatory

bodies and governments, as necessary

Failure to have a strategically-driven process for consideringoutsourcing can result in organisational conflict, inefficient use of resources,or increased risk of poor service delivery

Parties(Examples)

Parties(Examples)

Phase I: Candidate Identification

Phase I: Candidate Identification

Phase II: Outsourcing

Analysis

Phase II: Outsourcing

Analysis

DecisionDecisionOutsourc

eOutsourc

eWhich

vendor?Which

vendor?

Phase III: Implementation

Phase III: Implementation

Internal Service Provider

Customer(s)

Management Body

Ad Hoc Team

Vendor

Others as Appropriate

Internal Service Provider

Customer(s)

Management Body

Ad Hoc Team

Vendor

Others as Appropriate

Clearly defining the roles and responsibilities of eachparticipant in the process (including the vendor) is critical

Page 127: Strategic Innovation - trends, challenges and best practices

IssuesIssues

Identification of services to include

The treatment of “corporate roles” versus “services”

Managing the interface between Service Providers and BU customers

Choice of transfer pricing mechanisms

Identification of services to include

The treatment of “corporate roles” versus “services”

Managing the interface between Service Providers and BU customers

Choice of transfer pricing mechanisms

DescriptionDescription

Need to objectively determine which services would be most efficiently and effectively delivered via the outsourcing model

Some enterprise-wide or non-discretionary activities (e.g., workforce planning, activities performed for legal or statutory reasons, etc.) may need to be handled differently

Need to determine key management processes to plan for and deliver services to business unit customers

Need to determine how outsourcing costs will be tracked and charged to business unit customers

Need to objectively determine which services would be most efficiently and effectively delivered via the outsourcing model

Some enterprise-wide or non-discretionary activities (e.g., workforce planning, activities performed for legal or statutory reasons, etc.) may need to be handled differently

Need to determine key management processes to plan for and deliver services to business unit customers

Need to determine how outsourcing costs will be tracked and charged to business unit customers

Actions To AddressActions To Address

Develop a structural decision model incorporating considerations such as availability of scale economies, strategic contribution of support services and segmentation of internal customers

Identify and categorise activities as “roles” or “services,” using defined criteria. Clarify how each will be provided and charged to the business units

Develop “partnering” processes to negotiate and articulate service requirements and costs, facilitate dispute resolution, provide monitoring mechanisms, etc.

Clarify basics for determining transfer prices (e.g., allocation rules, market-based pricing, benchmarking, etc.) and develop mechanisms to track, update and communicate as required

Develop a structural decision model incorporating considerations such as availability of scale economies, strategic contribution of support services and segmentation of internal customers

Identify and categorise activities as “roles” or “services,” using defined criteria. Clarify how each will be provided and charged to the business units

Develop “partnering” processes to negotiate and articulate service requirements and costs, facilitate dispute resolution, provide monitoring mechanisms, etc.

Clarify basics for determining transfer prices (e.g., allocation rules, market-based pricing, benchmarking, etc.) and develop mechanisms to track, update and communicate as required

Design of outsourced services should clarify key service issues and should develop management processes for ongoing interactions

Page 128: Strategic Innovation - trends, challenges and best practices

IssuesIssues DescriptionDescription Actions To AddressActions To Address

Overcoming Resistance To Change

Building Required Competencies

Rationalising Multiple Concurrent Change Initiatives

Managing The Implementation

Establishing A Consensus Regarding Internal Versus External Service-Provider Relationships

Overcoming Resistance To Change

Building Required Competencies

Rationalising Multiple Concurrent Change Initiatives

Managing The Implementation

Establishing A Consensus Regarding Internal Versus External Service-Provider Relationships

May arise from perceived loss of power/control (e.g., business units may resist having currently owned functions taken away from them because they don’t believe savings and service level goals will be achieved)

With the creation of an outsourcing organization, employees’ roles will change and different competencies will be required (e.g., staff function managers will need to act more like business managers with respect to pricing services, forecasting demand and being customer-service oriented)

It is important not to risk immobilising people or the operation of the business by changing too many factors at once

Often, companies do not fully recognize the magnitude of change/implementation (i.e., in terms of scope, time and resource requirements, etc.) and may assume that implementation can be a part-time effort conducted “in people’s spare time”

Occasionally, customers place less of a priority -- and hence expend less effort -- on developing/maintaining mutually beneficial internal partnerships than they do on external ones

May arise from perceived loss of power/control (e.g., business units may resist having currently owned functions taken away from them because they don’t believe savings and service level goals will be achieved)

With the creation of an outsourcing organization, employees’ roles will change and different competencies will be required (e.g., staff function managers will need to act more like business managers with respect to pricing services, forecasting demand and being customer-service oriented)

It is important not to risk immobilising people or the operation of the business by changing too many factors at once

Often, companies do not fully recognize the magnitude of change/implementation (i.e., in terms of scope, time and resource requirements, etc.) and may assume that implementation can be a part-time effort conducted “in people’s spare time”

Occasionally, customers place less of a priority -- and hence expend less effort -- on developing/maintaining mutually beneficial internal partnerships than they do on external ones

May be addressed by clearly identifying and communicating the need for change, by involving business employees in the Shared Services change process, and by offering incentives to change

May be addressed by assessing the required versus existing competencies and building skills to fill “gaps” through training or hiring of outside employees

May be addressed by prioritising change actions and dedicating resources to the change initiative aside from resources required to run the business

May be addressed by having a well-defined

implementation plan and a fully dedicated implementation team that is measured and rewarded based on the results of implementation

May be addressed by establishing a common set of measures to gauge the effectiveness of internal and external provider relationships and to guide fact-based decisions around maintenance of such relationships

May be addressed by clearly identifying and communicating the need for change, by involving business employees in the Shared Services change process, and by offering incentives to change

May be addressed by assessing the required versus existing competencies and building skills to fill “gaps” through training or hiring of outside employees

May be addressed by prioritising change actions and dedicating resources to the change initiative aside from resources required to run the business

May be addressed by having a well-defined

implementation plan and a fully dedicated implementation team that is measured and rewarded based on the results of implementation

May be addressed by establishing a common set of measures to gauge the effectiveness of internal and external provider relationships and to guide fact-based decisions around maintenance of such relationships

Implementation of outsourced services is complex, requiring patience and understanding…

Page 129: Strategic Innovation - trends, challenges and best practices

IssuesIssues DescriptionDescription Actions To AddressActions To Address

Shadow Organisations Develop

Poor Service To Internal Customers

Lack Of Continuous Improvement

Poor Decision-Making At The Business Unit/Line Manager Level

Shadow Organisations Develop

Poor Service To Internal Customers

Lack Of Continuous Improvement

Poor Decision-Making At The Business Unit/Line Manager Level

There may be a tendency for people to revert to the old way of doing things -- individuals may not feel comfortable in new roles; business units may not be willing to give up control of dedicated service providers; customers may not understand the new service model and find their own ways to get the job done

If people with the proper competencies are not put in place in the outsourced organisation, or if new service delivery processes are not developed, service quality may suffer

Even after outsourcing is implemented, ongoing refinements will need to be made to staffing or processes to capture the full potential of the efficiency gains

When business managers start “paying for services,” they may stop using some services that are critical to the business (e.g., training)

There may be a tendency for people to revert to the old way of doing things -- individuals may not feel comfortable in new roles; business units may not be willing to give up control of dedicated service providers; customers may not understand the new service model and find their own ways to get the job done

If people with the proper competencies are not put in place in the outsourced organisation, or if new service delivery processes are not developed, service quality may suffer

Even after outsourcing is implemented, ongoing refinements will need to be made to staffing or processes to capture the full potential of the efficiency gains

When business managers start “paying for services,” they may stop using some services that are critical to the business (e.g., training)

May be prevented by gaining employee buy-in through employee involvement in the change process, clearly communicating employee roles in attainment of group goals, and providing training (as appropriate) to allow employees to succeed in new roles

May be prevented by identifying required competencies and providing training to internal employees, or by acquiring competencies from outside of the company

May be prevented by instituting ongoing benchmarking, publication of performance milestones, and employee incentives

May be prevented by providing the managers with incentives to use the services or by finding a “sponsor” from within the organisation to promote use of service

May be prevented by gaining employee buy-in through employee involvement in the change process, clearly communicating employee roles in attainment of group goals, and providing training (as appropriate) to allow employees to succeed in new roles

May be prevented by identifying required competencies and providing training to internal employees, or by acquiring competencies from outside of the company

May be prevented by instituting ongoing benchmarking, publication of performance milestones, and employee incentives

May be prevented by providing the managers with incentives to use the services or by finding a “sponsor” from within the organisation to promote use of service

Commitment to change and leadership at all levels will help to ensure the ongoing success of outsourced services

Page 130: Strategic Innovation - trends, challenges and best practices

Standardiseor eliminateStandardiseor eliminate ReengineerReengineer

Outsourceor automateOutsource

or automateInto the

coreInto the

core

Low High

Impact on Core Processes

Uniqueness

Low

High

Know what and why you are outsourcing…

Page 131: Strategic Innovation - trends, challenges and best practices

Small And Medium Sized Organisations Small And Medium Sized Organisations

Page 132: Strategic Innovation - trends, challenges and best practices

Professionalizing the business infrastructure

Growth and organizational change

Managing succession and exitsStrategy for growth

Maintaining organizational

culture and values

Creating external networks and

market connectivity

Upgrading management skills

and capabilitiesChallenging the

leader's assumptions

Eight Key Challenges In Growing & Developing A SME

Page 133: Strategic Innovation - trends, challenges and best practices

Creating external networks and

market connectivity

Eight Key Challenges In Growing & Developing A SME

Entrepreneurs need to be connected to suppliers, markets, financiers, competitors, advisors and colleagues to gain the momentum needed to propel a young company through the growth stages.

Supplier

Financier

Competitors

Advisors

Clusters appear to be important factors for growth since they encourage innovation and collaboration, draw customers and create confidence.

By collaborating with colleagues and competitors, small companies can overcome power asymmetries to compete with large, well-established companies for the same market.

Page 134: Strategic Innovation - trends, challenges and best practices

Upgrading management skills

and capabilities

Eight Key Challenges In Growing & Developing A SME

The turnover of some key personnel during a company's transition from one growth stage to another can be a sign of good management. In fact, it may be an indicator that real growth is occurring. Key personnel for one growth stage may not be suited to the working environment of the next stage.

Key personnel retained from one growth stage to another - including the entrepreneur-owner - need to retrain to learn the management skills required for the next growth stage.

Managers need to think ahead in order to draw the company forward. This means finding and hiring personnel with experience in the next growth stage and developing human resource practices and compensation packages to match. It also means upgrading their own aspirations to pursue new product development and global opportunities.

Page 135: Strategic Innovation - trends, challenges and best practices

Challenging the leader's assumptions

Eight Key Challenges In Growing & Developing A SME

Entrepreneurs can become too focused on the needs of their present growth stage and be unable to step back to see where they are headed. The perspective of outside advisors, especially those with relevant experience, is critical for successful transitions from one growth stage to the next.

Sources of advice include family, lawyers, accountants,boards, employees and professional consultants.

SME managers need to consider the expertise and objectivity of advisors when choosing an advisory team.

Page 136: Strategic Innovation - trends, challenges and best practices

Managing succession and exits

Eight Key Challenges In Growing & Developing A SME

Successful succession means passing the company to the next generation, selling it or delegating and letting go of responsibility and authority. Well-managed exits ensure that investors get their original money out and that the entrepreneur is adequately compensated for the years of time and effort spent building the company.

Both succession and exits require considerable planning.Entrepreneurs who enjoy being the manager and cornerstone of the company during the excitement of the start-up stage need to envision what they expect their role to be once the company becomes sustainable. Moreover, leaders who don't think ahead may not be adequately prepared to avoid unpleasant takeovers.

Page 137: Strategic Innovation - trends, challenges and best practices

Growth and organizational change

Eight Key Challenges In Growing & Developing A SME

Managers need to deal with organizational inertia in theface of a rapidly changing environment; yet many companies are unable to cope with change.

Clear plans and expectations, ongoing consultation and communication across the organization, step-by-step implementation of the change process, and allocation of adequate time and resources to change plans are all needed in order to ensure efficient change without reducing productivity.

Page 138: Strategic Innovation - trends, challenges and best practices

Strategy for growth

Two Jobs AwayBusiness Plan

Action Plan

Goals

Product development

Revenues and profit

People Development

Weak SME strategic planning practices occur wheninsufficient attention is paid to an action plan. Action plansneed adequate resources to ensure effective follow-through andconcrete results.

Although some SMEs have strategic plans, they often failto update them. Changes in key organizational variables, suchas a company expansion, a new product line or a new marketingproject, signal the need for a new plan.

Well-developed strategic plans are useful for SMEspursuing financing. But plans are not the same as action.Management teams that become preoccupied formulating andrevising plans ignore the most important part of the plan ó theaction that results from it.

Strategic plans need to be flexible enough to leave roomfor innovation and new ideas. Managers who avoid innovationbecause of inherent planning challenges forego significantgrowth and profit opportunities.

Page 139: Strategic Innovation - trends, challenges and best practices

Professionalizing the business infrastructure

Eight Key Challenges In Growing & Developing A SME

SMEs tend to operate with informal structures, an arrangement that places additional stress on managers who must control multiple aspects of the company. While suitable for a start-up, this informality becomes a drain on resources as the company moves into the fast growth and sustainability stages.

Once in the fast-growth stage, a company needs to formalize its operations, including human resource practices, accounting systems, inventory procedures, performance measures and formal boards of directors and/or advisors. This formalization is a structured and accountable way for the manager to delegateresponsibility.

Page 140: Strategic Innovation - trends, challenges and best practices

Maintaining organizational

culture and values

Eight Key Challenges In Growing & Developing A SME

Original Dream

In the start-up stage, the values of a company are those of the leader. As the firm grows, the values become those of the entire staff, with each new recruit adding to the culture.

Companies with a positive organizational culture tend to have more loyal and dedicated employees, which contributes to productivity.

Successful managers create desirable organizationalculture by hiring based on company values, compensating and rewarding employees for behaviours consistent with these values

Page 141: Strategic Innovation - trends, challenges and best practices

Managing the financing gap

Eight Key Challenges In Growing & Developing A SME

$

SME managers promote their companies to lending and investing institutions from their own perspective rather than from the financier’s perspective. Consequently, they often failto communicate the investment potential of their company.

Managers can improve their chances of obtaining financing by learning the language of finance, using advisors to help plan their presentations and writing business plans that targetthe financier’s interests.

SMEs need to consider a wider spectrum of financing options, from venture capital to angel and family investors.

When approaching investors, SMEs should consider compatibility of objectives, especially in arrangements in which the entrepreneur trades control of a company for capital tofinance survival or growth.

Page 142: Strategic Innovation - trends, challenges and best practices

Intended Successor Identified

Owner(s) SeekingExit Route

Family Succession

Develop New InternalOwner

Sale DecisionIn Principle

Exit PreparationActivities

New OwnerSearch Activities

Closure AndAsset Sale

SuccessionFailure

SuccessfulSuccession

Ownership Transfer

New OwnerIn Place

Owner Motivation

Stakeholder Conflict

Family Successor Changes Mind

Search Fails

SaleFalls

Through

Management Team Unable To Raise Finance