PwC's Global Innovation Survey: US Summary

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What sets breakthrough innovators apart PwC’s Global Innovation Survey 2013: US Summary

2 PwC’s Global Innovation Survey 2013: US Summary

While businesses have long embraced and funded innovation, they’ve not always used it effectively to deliver growth. That reality is changing. In our work with clients and in our research exploring the relationship between innovation and growth, we’re seeing huge shifts in nearly every industry in how companies are approaching innovation and in the results they expect to see from it.

To gain a deeper understanding of the magnitude and direction of this transformation, we surveyed nearly two thousand executives from more than 25 countries and 30 sectors to discover how innovation is driving growth; 300 of the respondents are US executives. Our study is the most extensive assessment of growth and innovation to date.

In this research we’ve found two things: fi rst, most companies are still innovating in incremental ways that are safe, profi table and important for their growth.

Things get more interesting when we look at the companies who are taking a more comprehensive approach to innovation, 20 percent of our study.

These companies expect to grow by more than 60 percent over the next fi ve years, adding a total of more than US$250 billion in new revenue. That’s a growth target that is twice as fast as the global average in our study and more than three times faster than the least innovative companies.

US companies are tracking with this shift toward a broader approach to innovation, yet most of the pioneers in our study are not US companies. In fact 82 percent of the most aggressive innovators we surveyed are based outside the US. Plenty of US companies are highly innovative but as a whole, our study did not uncover a clear advantage for them as more companies around the world push the traditional boundaries of innovation. Thus if most US executives believe innovation will drive growth for their companies—and they do—then looking globally at what the most innovative companies are doing matters.

In this report, we’ll look at key differences between the top 20 percent of innovators and the US average and we’ll focus on why these differences are important.

Introduction

60%The top innovators in our study plan to grow by more than

60 percent over the next fi ve years and create more than US$250 billion in new revenue.

$250b

3PwC’s Global Innovation Survey 2013: US Summary

Sector of respondents

Wholesale Engineering and construction

Other

14% 12% 10% 6% 5% 5%

Industrial manufacturing

Retail Technology Entertainment and media

Information and communication

Healthcare providers

4% 4% 4%

4%

4% 3%

3% 2%

1%

1%

1%

1%

1% 1% 1% 1%

2% 2% 2% 2%

3%

Pharmaceuticals Banking Automotive Petroleum, oil, gas

Insurance Consumer packaged

goods

Utilities Medical devices

Chemicals Aerospace and defense

Metal Mining

Transportation Agriculture Capital markets

Business services

Investment management

Logistics

What sets the top innovators apart?All companies want growth. Those with the most aggressive growth targets, not coincidentally, have plans for more than incremental innovation alone. They’re planning new value offerings, which means they’re attempting to transform what is sold and delivered to the market, how it is created and delivered, and who gets value from what they offer.

In April 2013, we began a new study on innovation, which has included 1,757 interviews and covered 30 sectors, including 249 industrial manufacturing companies, 218 retail companies and 176 technology companies. About a fi fth of the overall sample set themselves apart. We consider this group to be the top innovators and they:

• Plan to grow at 10.2 percent per year on average for the next fi ve years

• Have a well-defi ned innovation strategy

• Concentrate on a greater proportion of breakthrough and radical innovations

• Take a more formal and structured approach to innovation

• Have a more diverse set of collaborators and plan to collaborate more than others to harness innovative ideas

These companies are setting themselves apart not only by what they are doing (the innovation strategy) but how they plan to do it (the innovation operating model).

1,757

2530

C-suite and executive-level respondents

From more than 25 countries

From across more than 30 sectors

¹⁄5 Set themselves apart as top innovators


Innovation strategy: A greater focus on breakthrough ideas


Among our top innovators, 79 percent agree their company has a well-defi ned innovation strategy compared with 67 percent of US companies.

In defi ning the innovation strategy, company leaders have chosen which areas of the business will be responsible for innovation. They’ve articulated how these decisions support the business strategy and they’ve made it clear who will benefi t and how.

As part of these strategies, top innovators are planning higher levels of breakthrough and radical innovations—and in more areas of the business. These companies recognize that there are more ways to drive growth than through innovative products, services, or technologies alone. They are increasingly focused on new business models, the customer experience, systems and process improvement, and supply chain innovation. A look at their innovation portfolios reveals a greater mix of breakthrough and radical ideas. What do we mean by this mix?

• Incremental innovations are changes to an existing product or service. The changes to the technology and business model are primarily aimed at protecting market share and maintaining margins. Competitors usually respond quickly to incremental innovations.

• Breakthrough innovations make much more substantial changes to the technologies and business models. Often called game changers, breakthrough innovations create greater competitive advantage than incremental innovations. Competitors have greater diffi culty responding to breakthrough innovations. As a result, a company with a successful breakthrough innovation increases revenues and margins.

• A radical innovation creates drastic changes to the competitive environment for a product or service, or creates entirely new businesses. Radical innovations occur infrequently but can generate explosive growth in major new categories of products and services.

53%37%

Technology

47%30%

Services

45%26%

Products

45%29%

44%29%

Customer experience

43%29%

Systems and processes

37%29%

Supply chain

45%Top 20% most innovative companies

US companies45%

Business model

Leaders: Transforming more areas of business

How signifi cant will your innovations in the following areas be over the next three years?

All citing ‘breakthrough’ or ‘radical’ innovation.

Base: Top 20% most innovative (359) and US respondents (332) Source: PwC’s Global Innovation Survey, September 2013.

More top innovators have a well-defi ned innovation strategy

79% 67%

Top innovators US companies


What will your company innovate?Innovation strategy requires tough choices and the need to balance competing impulses: incremental versus radical innovation; freedom to innovate versus scalable process; visionary leadership versus management effi ciency. And it’s important to re-evaluate from time to time, as innovation practices evolve.

In the US, half of the executives we interviewed (51 percent) say their greatest concern about innovation is developing the right strategies for the growth they need to achieve. If you’re one of these executives, you’ll face key questions to get to a strategy that’s specifi cally designed to deliver new growth, including:

• How much innovation does your company need, given your business growth objectives? Too much innovation is a drain on resources. Too little innovation squanders opportunities for growth.

• Which areas of the business need breakthrough innovation? Leading companies are considering a broader range of possibilities: products, services, technology, business models, systems and processes, the customer experience, and the supply chain. They’re defi ning which areas of the business will carry out a mandate for innovation, who should benefi t, and what results to expect.

• What’s the right balance between incremental, breakthrough, and radical innovations? How much can each area handle? In our study, the most innovative companies expect to achieve far more breakthroughs in more areas of the business within the next fi ve years than their less innovative peers. The implications are that more areas of the business will undergo a transformation in these fi rms.

Half of the US executives we interviewed say their greatest concern about innovation

is developing the right strategies for the growth they need to achieve.

51%


Going from idea to reality


Leaders: More collaborative relationships

With which of the following do you have a plan in place to collaborate over the next

three years to deliver innovative products and services?

Competitors

Academics

Suppliers

Customers

Strategic partners

26%41%

57%67%

68%75%

84%91%

85%95%

Top 20% most innovative companies

US companies

When designing the innovation operating model—how you’ll select and commercialize ideas—you’ll balance a range of dimensions, including leadership involvement, fi nding the right talent, strategies for working with your ecosystem of collaborators, and of course, the metrics and motivators you’ll put in place that drive the right actions.

Our overall study explores these different dimensions of the innovation spectrum through PwC’s Innovation Blueprint: a framework for thinking through an innovation strategy that really works in practice.1 While all elements of the Innovation Blueprint are important, we see a few as particularly important for US companies, including working with an ecosystem of partners and collaborators and managing the process and governance to commercialize ideas quickly.

Unleashing the energy of more people US companies are often recognized as being collaborative, yet the top innovators in our study plan to collaborate more with a more diverse set of stakeholders over the next three years than the US average. The reality is that collaboration is one of the most important elements of successful innovation today, a result of the pace of technological change as well as the explosion of specializations around the world.

1 For more information on PwC’s Innovation Blueprint, see PwC’s Breakthrough innovation and growth: Top innovators expect US$250 billion fi ve-year revenue boost, September 2013.

Nearly all respondents in our survey plan to focus on strategic partners, in particular, because strategic partners are the most likely to help companies fi nd new ventures, share the risk, and commit their own resources to develop innovative ideas. A diverse set of collaborators—including academics and competitors—is equally important for companies that want to identify and cultivate the best ideas.

Over the long term, leading companies want to build a reputation for successful collaboration. Their goal is to secure a position as a strategic partner of choice

to sustain the company’s competitive advantage. Becoming a partner of choice—the preferred company to commercialize a new idea—puts the company in the best position to attract new and better ideas in the future.

One of the largest stumbling blocks for companies when working with outsiders is trust. Stephen Hucal, founder of Paymentfl ex, a North American fi nancial services technology company, agrees. “For collaboration to work requires trust,” he says. “If two partners don’t trust each other, they won’t be able to work together to solve a problem for mutual benefi t.”



What is a structured approach, exactly?Innovation involves the need to generate, test, improve, scale, and commercialize ideas in a structured way. Companies also recognize they have to move fast or the opportunity may be gone. Nearly two-thirds (58 percent) of US executives say that taking innovative ideas to market quickly and in a scalable way is an ongoing challenge.

The most aggressive innovators are more likely to use structured management approaches to innovation in order to speed the process. This includes both formal accountability for innovation within individual business units and separate facilities in certain markets dedicated to making innovation happen. Both fast and disciplined, these approaches reward failure, and as a result they tend to encourage creativity. US companies, as a whole, are less

likely to have more formal innovation structures at the individual business unit level. They’re also less likely to have separate innovation functions in important markets.

Why is this important? By their nature, structured approaches can be reproduced and repeated, helping companies commercialize more ideas, faster and cheaper. Companies taking a structured approach to innovation tend to have a more rigorous selection process and fund fewer, higher-value projects so that time and resources are not wasted.

As a result, top innovators are building the capabilities to explore ideas aggressively, but can quickly decide when to move to each consecutive stage of the innovation process—from idea to commercialization. They strike a careful balance between fostering creativity and imposing structure.

For collaboration to work requires trust. If two partners don’t trust each other, they won’t be able to work together to solve a problem for mutual benefi t.Stephen Hucal, founder of Paymentfl ex

David Paratore, President and CEO at The NanoSteel Company, a leader in nano-structured steel material design agrees. “It’s true that you can’t schedule innovation,” he says. “But the reality is, the interface between ‘I can’t schedule innovation’ and ‘I have customers who need it yesterday’ is a diffi cult one. When it comes to innovation, you’re not scaling production; you need to scale brain power because the market won’t wait for you.”

78% 21%

Where do top innovators fi nd new ideas?

A structured approach to innovation

Informally, from market needs or good ideas


How will your company innovate?Among US fi rms, developing the right innovation strategy is a top concern for half (51 percent) but carrying out the company’s innovation strategy is a top concern for the other half (49 percent). In other words, half know the direction they need to take, but they’re not sure the company is organized well to make innovation work. For some, the concern is developing the right innovation operating model (25 percent). For

Leaders: More formal structures, including separate innovation facilities

Which of the following approaches to managing innovation does your organization take?


We have separate innovation facilities in important markets

We drive innovation across the entire organization,across business units and territories

We have a formal innovation structure within individual business units

Individual product areas or services are responsible for their own innovations

35%50%

58%62%

59%76%

74%73%

Top 20% most innovative companies

US companies

49%

• What’s the right accountability structure for your company’s culture? US companies in particular, put a greater emphasis on leadership being involved in innovation as well as providing opportunities for all employees to participate in the company’s innovation operating model. When deciding who will innovate, consider which cultural headwinds can work to your advantage.

• Can breakthrough ideas happen in the day-to-day activity of the business? Sometimes to create the business of the future, you need to be away from running the business of today. The most innovative companies are more likely to set up innovation facilities in important markets as a complement to the innovation happening within the business units.

• How do you select the best people, collaborators, and co-creators for the job? Finding and retaining the best talent, with the skills required to execute different types of innovation, is among the top management challenges for US fi rms. So is fi nding the right external partners to make innovation happen.

others, it is executing on the chosen operating model to make innovation work (23 percent).

In this report, we’ve looked at two particular strengths of the most aggressive innovators in how they make innovation work—in creating more formal, yet fl exible structures for accountability and in collaborating with a more diverse set of stakeholders. These areas lead to another set of guiding questions:

Carrying out the company’s innovation strategy is a top concern

for half of US companies.


Moving beyond incremental innovation


Taking innovative ideas to market quickly and fi nding the right people to do it, day in and day out, needs regular management attention.

It sounds simple enough: design an innovation strategy and execute it. In reality, you will manage innovation like every other aspect of the business, iterating again and again on how to reach the goals you’ve set for the company, business unit, or product/service line.

US companies’ challenges are no different than others in this regard: taking innovative ideas to market quickly and fi nding the right people to do it, day in and day out, needs regular management attention.

If you’ve already put innovation into high gear you’ve begun to answer many of the questions we’ve raised in this report and you’ve started to make breakthroughs happen quickly and in a scalable way. But if you’re not seeing your company put innovation to work, it’s time to identify what’s missing and how you can ensure all of the pieces are in place that you need.

US companies face several ongoing challenges to making innovation work

How challenging do you fi nd the following aspects of making innovation happen

within your company?

Base: US respondents (332) Source: PwC’s Global Innovation Survey, September 2013.

Taking innovative ideas to market quickly and in a scalable way

Finding and retaining the best talent to make innovation happen

Finding the right external partners to collaborate with

Establishing an innovation culture internally

Having the right metrics to measure innovation progress and track ROI

Net challenging: 58%

Not at all a challenge Fairly easy Neither easy nor a challengeSomewhat challenging Very challenging





4% 9% 30% 51% 7%

10% 31% 46% 11%2%

4% 11% 29% 47% 9%

8% 35% 44% 7%5%

3% 11% 39% 39% 8%


About PwC’s Global Innovation Survey

PwC’s Global Innovation Survey (www.pwc.com/innovationsurvey) explores the changing dynamics of innovation across the global business landscape. It is based on interviews with 1,757 C-suite executives responsible for overseeing innovation in their company; 332 of these respondents represent US companies. These interviews were conducted across more than 25 countries and 30 sectors between April and July 2013.

Participants in this research represent a balanced sample of C-suite executives, including the CEO, CIO, COO and heads of R&D and Innovation. Half of respondents represent companies with annual revenues above $500 million; one third represent companies with annual revenues above $1 billion.

For the purpose of our analysis, from the 1,757 companies interviewed we identifi ed a top 20 percent for innovation (359 companies), and a bottom 20 percent for innovation (395 companies) to explore the relative characteristics and experiences of each group. These companies were identifi ed based on a balanced scorecard comprising the following six criteria:

1 How important the interviewee said innovation is to their company

2 Their appetite for innovation (on a scale from “innovation laggard” to “innovation pioneer”)

3 The proportion of annual revenue derived from major products or services launched in the previous year

4 The proportion of annual revenue spent on innovation

5 The proportion of products and services co-developed with external partners

6 Their projected revenue growth over the next fi ve years

Each of the six attributes was given a score between 1 and 5. The most innovative 20 percent of companies scored a total of 23 or more out of 30; the least innovative 20 percent of companies scored a total of between 7 and 15 out of 30.

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member fi rm, and may sometimes refer to the PwC network. Each member fi rm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC US helps organizations and individuals create the value they’re looking for. We’re a network of fi rms in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and fi nd out more by visiting us at www.pwc.com/us.

PwC has exercised reasonable professional care in collecting, processing, and reporting of this information but has not independently verifi ed, validated, or audited the data to verify the accuracy or completeness of the information. AT-14-0074

To have a deeper conversation about how this subject may affect your business, please contact:

Rob SheltonGlobal Innovation Strategy LeadTel: +1 408 817 [email protected]

www.pwc.com/innovationsurvey

PwC's Global Innovation Survey: US Summary

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