1

150 years (or so) ago, everything was done by hand

2

Now it’s done by finger (tap)

3

Yet…. slow growth is painful for everyone

4

Source: World Bank, New York Times

The Innovation Paradox

Michael Holman

VP Intelligence

June 1, 2017

Agenda

Challenges to growth

Innovations to fight back

Strategies to succeed

6

Agenda

Challenges to growth

Innovations to fight back

Strategies to succeed

7

Productivity growth has slowed

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2014

8

U.S. total factor productivity growth, previous 10 years

Source: The Rise and Fall of American Growth, Robert Gordon

And it isn’t just a U.S. phenomenon

9

What to make of this?

10

“There has been a burst of innovations recently… that we will see come to fruition in the next five to 15 years…”

- Erik Brynjolfsson, MIT Sloan

“The economic revolution of 1870 to 1970 was unique… so many of its achievements could happen only once”

- Robert Gordon, Northwestern

Demographics are poised to make things worse…

11

Europe

Corporate innovation strategy is missing the boat

12

Slowing productivity

growth

+

Demographicheadwinds

?=

Lower growthopportunity

This is an innovation challenge – is your firm set up to meet it?

155 clients

Of 15firms

just

discuss productivity in corporate goals

5firms

and only

have productivity in innovation goals

Agenda

Challenges to growth

Innovations to fight back

Strategies to succeed

13

Where to focus for opportunities ?

14

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

TF

P G

row

th, 2

00

4-2

014

Output growth, 2004-2014*Bubble sizes indicate 2014 output

Productivity and output growth of select U.S. industries

Source: U.S. Bureau of Labor Statistics

Where to focus for opportunities ?

15

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

TF

P G

row

th, 2

00

4-2

014

Output growth, 2004-2014*Bubble sizes indicate 2014 output

Building and Construction

Source: U.S. Bureau of Labor Statistics

Productivity and output growth of select U.S. industries

Building and construction: From mass production…

16

… to building information modeling and advanced construction technologies…

17Source: Lux Research, “The Industrial and Digital Revolution in Building and Construction”

… to robots and, believe it or not, 3D printing

18

~$10,000 – Levittown prices!(actually Levittown house ~$80k in 2017 dollars)

Where to focus for opportunities ?

19

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

TF

P G

row

th, 2

00

4-2

014

Output growth, 2004-2014*Bubble sizes indicate 2014 output

Fabricated metal products

Chemical products

Food, Beverage and Tobacco

Petroleum and coal products

Source: U.S. Bureau of Labor Statistics

Productivity and output growth of select U.S. industries

Manufacturing: From electrification…

20

First industrial electric motors

Sources: Electrical Power in American Manufacturing, Richard Duboff; “From Shafts to Wires: Historical Perspective on Electrification,” The Journal of Economic History 43 (2), 1982, p. 347

…to sensing and connectivity…

21

…to ease of integration

22

Where to focus for opportunities ?

23

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

TF

P G

row

th, 2

00

4-2

014

Output growth, 2004-2014*Bubble sizes indicate 2014 output

Ambulatory Health Care Services

Hospitals and Nursing and Residential Care Facilities

Source: U.S. Bureau of Labor Statistics

Productivity and output growth of select U.S. industries

Health: From saving us from bad water…

24Source: Gordon; Encyclopedia of Chicago; Chlorination of Water, Joseph Race 1918

…to saving us from bad food…

25

Source: OECD ObesityUpdate 2017

0%

5%

10%

15%

20%

25%

30%

35%

40%

1985 1995 2005 2015

France

Italy

Spain

England

USA

Switzerland

Prevalence of obesity

Ad

ult

ob

esit

y ra

te

…to giving us better food

26

Agenda

Challenges to growth

Innovations to fight back

Strategies to succeed

27

Why do we need a new approach?

28

The future is already here – it’s just not evenly distributed yet

Leading firms are seeing productivity growth, but most others are flatlining

29

Source: Andrew G Haldane, Chief Economist, Bank of England

Business model innovation can help the leaders bring laggards along

30

Revenue Model

Supply Technology

Organizational Design

Application Technology

Markets

Product Product Requirements

Value chain

supplier buyers

product

moneySU

PLLIER

BUYER

SSU

PLLIER

BUYER

S

TASKORG

TASKORG

Source: Lux Research, “Business Model Innovation: Industry’s Latest Fad or a Useful Approach to Strategy?”

Bringing manufacturing analytics to the masses

31

0%

20%

40%

60%

80%

100%

Manufacturing Energy Heavy Industry

Manufacturing lacks in adopting predictive maintenance (PdM)

Use PdM Don't use PdM 0% 10% 20% 30% 40% 50% 60%

Cost to implement

Effort to implement

Culture

Lack of knowledge

Lack of proof of value

Lack of mgmt support

Non-adopters lack know-how

Source: Lux Research, Predictive Maintenance: The Art of Uptime

“the idea was to take the expensive approaches (which often cost more than $10 million …) and make them more affordable”

Enabling adoption of distributed generation assets

32

2kj

Targeting the developing world

33

Conclusions

Declining productivity growth is a key megatrend affecting growth – companies need to have an innovation strategy to respond

Technologies emerging today can help address this trend – and generate strong new business opportunities

Widespread adoption of these advances will require business model innovationas well

34

Lux Research Inc. 100 Franklin Street, 8th Floor Boston, MA 02110 USA Phone: +1 617 502 5300 Fax: +1 617 502 5301 www.luxresearchinc.com

Thank you

Michael HolmanVP Intelligencemichael.holman@luxresearchinc.com+1 646 723 0161