Kennametal’s Innovation Journey

George W. Coulston – VP Innovation Ventures

November 17th, 2011

PDMA Outstanding Corporate Innovator

• Why Kennametal? Why Now?

– Our commitment to innovation during a down economy

– Tools, Processes, and Executive Engagement

– The creation of an Innovation Venture Group targeting EBO’s

Sally E. KayChair, PDMA OCI Selection Committee

Strategic Alignment, Disciplined Processes, and Executive Involvement are Key Success Factors for Sustainable Innovation

What We Do…

$2.4+ Billion

80,000 +

11,600 +

1,700 +

42%

60 +

<3%

2011 Revenues

Active Customers

Employees

Patents

% Revenues From Products < 5 years

Global Countries

Largest Single Customer

Provide Cutting Tools and Wear Components for nearly all the world’s critical manufacturing processes through Advanced Materials

Solutions

© 2009 Kennametal Inc. l All rights reserved. l 4

How We Went to Market in 2009

Tooling Systems

Milling

Solid Carbide Drilling

Indexable Drilling

Turning

Fixed Cutter Bit

Carbide Substrate Custom Wear Solutions

Extruder BarrelsRoad Razor

Cladding Oven

Two Independent Business Units!

60% of Revenues 40% of Revenues

Consumables Business, Premier Products

Metalworking Solutionsand Services Group

Advanced Materials & Solutions Group

Early 2000s Recession Results

Source: R Gulati/HBS

Opportunity to Reinvent Ourselves with Innovation Focus

Survive 48%

Bankrupt/ Liq-uidate 23%

Private 1% Other 8%

Ac-quired

9%Breakaway

11%

Becoming a Breakaway Company

IndustrialBusiness

InfrastructureBusiness

Kennametal Enterprise OrganizationAerospace & Defense

TransportationGeneral

Engineering Energy Earthworks

How We Go To Market Today

A Market-Driven Enterprise Approach to Improve our Customer Intimacy

Regional Sales: Deliver Solutions through Customer Intimacy

Global Functions: Excellence / Synergy / Efficiency

Five Segment Leaders

Language and Measures of Innovation

Core BusinessExtend/Defend,

Increase Productivity& Profit Contribution

Emerging OpportunitiesTest Business Models,

Prove Viability, Capability, ValueSeed Growth Businesses

Learning Required

• Revenue, Profit , ROIC, Costs, Productivity or Efficiency

• Project-based Milestones• Creating Business Design• In Market Pilots

Breakthrough

Growth Business

Proven Business ModelIncrease Share &

Grow to Opportunity

• Market Share Gains• New Customer Acquisition• Profit

Adjacent Market Growth

Achieve Revenue Profit

Tim

ing

Innovation is Delivering Ever-Increasing Value to Customers

Leadership Commitment to Innovation

Quick Business

Assessment

Business Case

Development

Product Development

Field Test LaunchNew

Product Sales

$2 4 5 LC PL

Executive Level Gatekeeper Participation at Gate 3 (“Money Gate”) and Post-Launch Review:• Ensures High-Level awareness of pipeline

activity• Guarantees strategic alignment of

development programs• Controls quality of execution for programs

entering and exiting the pipeline• Provides Opportunity for Growth and

Development of our People

NPD is a Business Process – it is not an R&D Process

Stage Gate Development for the Core

A Linear Process

Driving New Products at an Accelerated Rate

Technology and InnovationAdvance withTechnology

55% reduction in NPD cycle time

Increasing our new product %

Decreasing SKUs

NPD Efficiency & Effectiveness Measures

Learnings About Core

If the philosophy is ….• Focusing on how to do better what has previously

been done• Managing a group as good or better than their

predecessors• Better optimizing the performance of their teams• Focusing on core capabilities, customers, assets,

functionality, etc. and defending the core with incremental opportunities to extend it

• Take care of the short term, the long term will take care of itself

“Great Companies Missed Opportunities To Compete More Efficiently”

The end result will deliver ….• Late to new innovations• Breakthroughs never develop• Incapable of addressing market challenges

There Is Statistical Evidence That Companies “Built To Last” Regularly And Systematically Underperform In The Market!

Another Rationale for Focus on EBO’s

Breakaway Companies Target Emerging Business Opportunities

Evolutionary vs. “New to X”

Kim & Mauborgne, “Blue Ocean Strategy”, 2005

Business Launch

Revenue Impact

Profit Impact

86%

62%

39%

14%

38%

61%

When Successful…

4x Revenue Potential

10x Profit Potential

Innovation Ventures Group

Core Business

Growth Business

Emerging Business Opportunities

Time to Cash Time to Market Time to Pilot

IVG is not about long range R&DIt is about capturing New Sources of Customer Value in ways not done today by KMT Core

EBO‘Core’ Processes • ACE: Execution focused against

defined SMART Objectives• Standardized deliverables with goal

to minimize process variability

IVG Processes• Governance Council• Probe & Learn: Change course

based on market feedback

Different Outcome Requires Different Process

TRANSITION

• Market Development: Develop critical customer base by achieving first sales

• Structure strategic alliances and ensure qualification of external supply chain partners

• Validate financial model assumptions

• Lead commercial launch activities including product promotion and manufacturing scale-up

INCUBATION

• Systems level approach often with external technology integration

• Prototype testing in the market

• Determine business model and path to market with sustainable commercial opportunity

• Develop technology/vendor partnerships

• Market Mapping: Evaluate market dynamics in white space

• Open Innovation and Technology Mapping: Define technology landscape and influence technology strategy

• Collect VOC, translate unarticulated needs into requirements

• Begin testing to define value proposition and articulate opportunity

IDEATION

Leading Growth Into New Spaces with Innovative Solutions

© 2011 Kennametal Inc. l All rights reserved. l Proprietary and Confidential l 13

Technology

Current

Adjacent

New to companyor beyond

Market

Current Adjacent

60-75%

50-60%

40-55% 25-40%

New to companyor beyond

5-25%

Reference: “Is It Real? Can We Win? Is It Worth Doing?”, George S. Day, HBR, Dec-07

Probability of Success

IVG Portfolio Overview

Beyond Blast Forming Tooling

Coatings RelatedOpportunity

New Materials RelatedOpportunities

Metal CuttingBusiness Model

Summary

• Innovation is the Process of Delivering Ever-Increasing Value toCustomers– Business Strategies need to be aligned with the market– Innovation strategies must be aligned to the business

• Create a common language for Innovation in your company– Different forms need different management processes

• Executive Involvement critical– Culture– Resources / out-of-cycle budget needs– Multi-aligned / unaligned opportunities

Strategic Alignment, Disciplined Processes, and Executive Involvement are Key Success Factors for Sustainable Innovation