Johnson Chng, Managing Partner, A.T. Kearney Greater China Johnson.chng@atkearney.com +8613501106784, +85268525572

10th Nov 2012

China Business Forum, London Business School

Innovation and sustainable growth

The secrets of success

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Focuses on new or improved products derived from trends and customer needs, including product modifications/improvements, new products based on existing or new technologies, new applications etc.

Focuses on cost savings in production process and entire value chain through process improvements

Focuses on services, surrounding the core product offering such as handling or technical customer service, that will generate additional value for customers

Focuses on new business models in terms of vertical integration, sales channels, cost structure, pricing model, etc.

There are typically four types of innovation: product, process, service and business model

Types of innovation

Meanwhile, technology is typically an enabler for these four types of innovation

Source: A.T. Kearney

Focused areas

Business Model Innovation e.g. reverse

auctions at EBay

Product Innovation

e.g. Apple’s iPhone

Process Innovation

e.g. RFID and bar codes in logistics

Service Innovation

e.g. realtime flexible packaging in travel

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A.T. Kearney's view on innovation process: from the market to the market

Source: A.T. Kearney

Scope of innovation management

Business strategy

Innovation strategy

Product development & launch

Profit generation

Macro trends

Corporate Strategy

Div / BU Strategy

Idea funnel management

Idea

Idea

Idea

Idea

Idea

Idea

Idea

Idea

Idea

Idea

Turnover

T Launch

Product extensions

T 0 T Profit T End of Life

Time-to-Market

Time-to-Profit

Maximize profit

Customer Needs

Market/Techno- logy Trends

Capabilities

Roadmaps

Innovation Budgets

Search Fields

M

A

R

K

E

T

M

A

R

K

E

T

Profit is not the purpose for innovation, but it is the result of innovation

The process for successful innovation implies a holistic view from strategy to maximizing product life cycle profitability

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Innovation leaders Innovation followers

Strategy • Innovation part of strategic agenda • Explicit definition of search fields • Separate technology maintenance and

customer-driven projects

• Innovation is a result of different initiatives and projects (e.g. Product Management, IT, etc.)

Value-

perception

• Identify customers’ value perceptions and purchasing decisions

• Focus on building brand loyalty

• Create services without considering customers’ value perceptions

Roles and

boundaries

• Have a flexible structure and allow employees to be creative

• Production and criteria-based idea management

• Engage partners, customers and employees in innovation activities

• Have a hierarchical structure & confine employees to specific job descriptions

• Poor idea generation and prioritization • Engage only employees in innovation

Technology • Use ICT to support innovation • Ensure standards and scalability • Focus on costs and differentiation

• ICT not leveraged / tools adopted late • Island solution (not scalable) • Focus only on costs

Best practice

Source: A.T. Kearney Best Innovator 2003-2008

The leaders in innovation excels in at least four key areas

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Major factors to ensure successful innovation include: (1) explicitly defined strategy and governance process

Correlation between having innovation strategy and meeting or exceeding innovation objective

Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis

Comments

• Companies with an innovation strategy are more likely to meet or exceed their innovation objectives

• However, strategy alone is not enough; governance and mechanism to drive implementation are critical, including accountabilities, resource commitments etc.

Best practice

• Apple: the project team are put into a common physical space, to enhance effective and fast conversations between teammates in order to incubate new ideas

• Procter& Gamble(P&G)

‒ Has a dedicated innovation organization with a dotted line to each of its businesses

‒ Each business has dedicated personnel in R&D responsible for driving innovation and interfacing with external partners, such as suppliers, to connect internal needs with outside ideas

• Google: The well-known 20 percent time policy has allowed its engineers to spend one day a week pursuing projects outside of their area of responsibility

No

53

47

Yes

2011

25

25

50

43

Without innovation

strategy

With innovation strategy

43

14

Does your company have a defined innovation strategy? (% respondents)

How well has your company performed to date against its innovation objectives? (% respondents)

Exceeding all or most objectives

Meeting all objectives

Meeting some or no objectives

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• Apple ‒ Aims to create rather than cater to the customer need

through innovating great products ‒ Spend whatever it takes to make and market the

products in order to delight the customers • P&G

‒ Known for capturing customer comments in real time to gain feedback on how a product is performing

‒ Such behavior enables continuous improvement and leads to repeat purchases and product loyalty

Best practice

(2) Focus of customer-centric growth

Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis

Prioritization of focus areas for innovation (% of respondents) Comments

• Customer demand is the leading criteria for innovation strategy design

• Such focus will lead to product introductions, faster time to market, and increased sales

• It is not the direct target for innovation to reduce cost, increase profit or improve the operations efficiency

Build competitive advantage

10

40

50

Access to new

markets and customers

10

50

40

Fit with existing

capabilities

70

30

Increase financial returns

50

50

Meeting consumer demand

30

70

Not considered Important Critical

Innovation should be focused on satisfying or even generating customer demand, rather than making money at the very beginning

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• Apple: as the CEO, Steve Jobs is the core for Apple’s innovation, who developed a top-notch team, set ambitious and clear vision and acted as both a policeman and cheerleader for product development

• Google

‒ Typically encourages open collaboration but is closed at times to surprise the market

‒ For example, Android and Chrome OS were the results of collaboration between Google and The outside community

• IBM: second-highest ranking executive is specifically charged with creating and maintaining innovation programs across the company

Best practice

(3) Led by people with senior and dedicated position, not just business unit heads

Leaders and owners for innovation activities

1. Study respondents also cite three additional areas as support roles: strategic planning (55%), operations(45%), and IT(18%). Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis

Comments

• Now it is the business unit head that have a leading role in innovation activities

• However, business units leader may comprise the needed firewall between today’s needs and tomorrow’s plans

• Best innovators usually have dedicated seniors to be responsible for innovation – it’s more possible to involve outside parties into the innovation process in this way

Business unit leaders

Director level

64

Functional vice presidents

36

36

CEO 27

55

64

27

64

Who is responsible for creating and leading the innovation agenda? (% respondents)

Which functions are involved in formulating the innovation strategy1? (% respondents)

Product development

45

Marketing and sales

55

R&D 64

Finance 9

Innovation 55

45

45

9

36

45

Leading role

Leading role

Supporting role

Supporting role

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(4) Clearly defined metrics for measuring innovation effectiveness

Comments

• A lack of metrics deprives companies of the ability to measure progress and drive corrective actions

• Though important, the metrics are difficult to design and execute

• There are some ongoing initiatives, e.g. The IMProve initiative in Europe (an initiative of the European Commission, Directorate General Enterprise and Industry), which provides an online innovation benchmarking tool for enterprises

Best practice

• IBM

‒ Defines business performance targets mainly for its core business and growth opportunities

‒ However, for emerging opportunities, it does not set financial targets

‒ Instead, it ensures that clear milestones are defined to track the progress of riskier projects to signal that they are on the right track

Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis

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The innovation in China is increasing fast but is mainly within China and of incremental instead of disruptive manner

Annual grants of patents in China1 (in ‘000, 2007—2011)

142134

9468

+29%

2011

961

2010

815

2009

Utility Model +28%

Invention +26%

Design +30%

150 177

128 250

204

135

335

344

172

380

408

582

2008

412

2007

352

Number of “Forbes 2012 World’s 100 Most Innovative Companies” by country

1. Including patent applications received from both domestic and abroad 2. For 2008 Source: Business Journal of the German Chamber of Commerce in China, www.SIPO.gov.cn, Forbes.com, secondary research, A.T. Kearney analysis

Others 14

UK 4

Switzerland 4

India 5

Germany 6

China 7 Japan

8 France 9

US 43

Innovation in China

• Growth and global impact ‒ The innovation in China, represented by patents

granted every year, is increasing at ~30%, but 95% of them are solely in China

‒ China only accounts for ~5% of the international patent applications2, compared with ~30% each for US and Europe

• Innovators by identity ‒ Most innovation is happening in the private

sector rather than in state-owned enterprises ‒ The innovation is driven by small to medium-

sized companies working to fill market needs ‒ The innovation-related workforce is young and

backed by little institutional expertise • Innovation areas

‒ Higher share of the world’s scientific articles in chemistry, physics, mathematics, engineering and computer sciences than in biology, medicine and life sciences

‒ Most are incremental innovations based on existing products or services rather than disruptive innovations on core technology, business model etc.

By type CAGR

• Baidu • Tencent • Moutai • Wuliangye • China Oilfield

Services • Sany • Zoomlion

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Service innovation case: HaiDiLao Hot Pot cultivates its capability in innovation by “serving” its employees first (1/2)

Introduction

• A famous hot pot brand founded in 1994 • 70+ self-owned hot pot restaurants in 15 cities

including Beijing, Shanghai, Xi’an etc., four logistics center, and one raw material plant

• $~360 million revenue and 14,000 employees for 2011

• Preparing for IPO

Source: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn through》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis

Culture

• Everyone is created equally and deserves the care and respect from the company

• The company is a platform for employees (normally migrant workers with middle-school education) to change their lives

• The company should employ not only the hands by also the brains of the employees, where the power of innovation come from

It is the best innovation by Hai Di Lao to treat the employees with care and respect, which is seldom seen in the low-end service industries in China

Innovative “services” to the employees by the company

Filial Piety

Respect

• Free collective apartments (not basement) in walking distance to the working place

• Trainings on reading map, using closestool, obeying traffic rules etc. to avoid blame or sneer from the citizens

• Establishing school in Sichuan province for the children of employees

• Compensation and bonus provided for the parents of employees (team leader level above)

• Free beach tour for the parents of outstanding employees every year

• Authorization of employees for free dish and discount as long as the action can improve customer satisfaction

• Name the innovation after the creator

Care

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Service innovation case: hence, unparalleled services innovation for the customers (2/2)

Innovative services to the customers

• Free gadgets while eating

‒ Glasses cloth

‒ Plastic bag for cell phone

‒ Elastic hair band

• Free services while waiting

‒ Shoeshine

‒ Nail cosmetology

‒ Fruit & beverage

‒ Chess & poker

‒ Internet

• 0.5 RMB1 discount per paper crane made while waiting

• Remote video system for dining between Beijing and Shanghai restaurants

Number of Hai Di Lao Hot Pot restaurants

1. About ten cents in USD Source: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis

71

26

631

1994

+36%

2000 2004

+20%

2012 2008

• After brand establishing stage for a decade, reaching a stage for rapid expansion while maintaining the image for supreme service

• Case study for Harvard Business Review (Chinese version, Apr 2009)

• Object of the book “Hai Di Lao: something that you cannot learn through” by Professor T.Y. Huang of Peking University

• Ten Best Hot Pot Brand 2007-2010

• Cast study object and guest speakers for the top tier local business schools

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Product innovation case: G’Five becomes a major cell phone maker worldwide by providing highly customized products

Introduction

• Founded in 2003 in Shenzhen as an mobile phone OEM and started its own brand “G’Five” since 2008

• Revenue $ 635 mil (2010) and ~5,000 employees • Preparing IPO in Hong Kong • Most revenue comes from overseas market, including

India, Middle East, Africa, South America etc., and entered China market in late 2011

• One of the largest mobile phone makers worldwide, e.g. No. 9 for Q1 2010 and No. 10 for Q2

• Rapid market expansion based on highly customized products, fast product development speed, reasonable price, and stable dealer relationship

Source: www.gfivemobile.com, Gartner, Factiva Inc., Cyber Media Research, secondary research, A.T. Kearney analysis

Mobile phone market share by sales unit for Q1 2010 Others

19.2% Huawei

1.3%

RIM 3.4%

G’Five 1.4%

ZTE 1.7%

Apple 2.7%

Motorola 3.0%

Sony Ericsson 3.1%

LG 8.6%

Samsung 20.6%

Nokia 35.0%

Innovative products in India

• Entered India in 2008, No.1 in 2010 (21% market share, by sales unit), and top five in 2011

• Given the poor power supply in India, especially in the rural area, developed new phone models with small screen but 30-day standby time, dual battery, and even #5/#7 dry battery

• Customized phone models according to regional and racial features

‒ For the Muslims: red and thin phones with the Quran and GPS pointing to Mecca

‒ For Sikhs and Hindustanis: white and thick phones with loudspeaker

• Facing 20+ telecom operators in the market, developed phones with 2 or 4 SIM cards

Innovative products in Middle East and Africa

• Phones with two loudspeakers (music needed for BBQ in the desert as a usual family activity during weekend in middle east and for dancing by Africans)

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The innovation will be even more emphasized by Chinese companies and revolutionary innovators are foreseeable

Driving factors for innovation in China

• Companies have to be more innovative in order to cater to the maturing domestic market and increasing consumer sophistication

• The evolution of industries in China from low-end producer to high-end product and service provider requires innovation

• Through the overseas expansion, the Chinese companies will try to reduce the gap in innovation with their foreign peers

• Policies1 are introduced by China’s central government to encourage innovation, especially in industries with high added-value and related with sustainability

1. Including 12th Five-Year Plan, The 12th Five-Year Plan on National Scientific and Technological Development, National Long- and Medium-term Program of Sci-Tech Development Planning, The Development Plan of the Strategic Emerging Industry During the 12th Five-Year Plan etc.

Source: Business Journal of the German Chamber of Commerce in China, secondary research, A.T. Kearney analysis

Trends in China

• In the foreseeable future, many Chinese companies will still focus on incremental innovation based on technology transfers and have relatively much less luxury to engage in fanciful idealizations

• Meanwhile, leading companies are on their way to evolve to be breakthrough innovators

• A wave of innovations will be seen, particularly in those areas in which China is facing enormous challenges as a result of its rapid growth: new energy sources, energy efficiency technologies, new materials, biotechnology, new pharmaceuticals, software and services, as well as new IT and internet solutions

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Best Innovator Europe Innova IMP3rove

• European competition

• Assessment of leading innovation capabilities

• More than1000 participants (2003 – 2009, 15 countries)

• Highly reputed jury and media partners

• On-line platform to assess innovation performance of SMEs

• More than 2500 benchmarks

• CEN Pre-Standard status to assess innovativeness of SMEs

Studies and Publications Selection

Publications

Books

White Papers

Source: A.T. Kearney

A.T. Kearney generates insights on innovation management from its cross-industry studies and publications

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