11 Barry Juruzelski

Booz & Company
Newport Beach, CA, February 17, 2011
How the Top Innovators Keep p p Winning

The Gl b l I Th Global Innovation 1000 ti
This document is confidential and is intended solely for the use and information of the audience to whom it is addressed.
Barry Jaruzelski leads Booz & Companys Global Innovation Practice and authors its annual Innovation 1000 Study
Barry Jaruzelski is a Florham Park, NJ-based partner who leads Booz & Companys Global y , p p y Innovation Practice. He specializes in corporate and product strategy and the transformation of core innovation processes for high tech and industrial clients. He previously served as the firms Chief Marketing Officer. Executing the global roll out of the new brand. A recognized thought leader, Barry is frequently quoted in publications like The Wall Street Journal, th Fi J l the Financial Ti i l Times, and Th N d The New Y k Ti York Times on th t h l the technology i d t and th industry d the challenges of innovation. He often appears as an expert commentator on ABC News, CNBC, NPR, and the BBC. He has been a guest lecturer at Harvard, Columbia, Tuck, NYU Stern, and MIT Sloan business schools. He has also presented his research on the drivers of innovation success to the National Academy of Sciences. Barry is a three-time recipient of the firms Professional Excellence Award, which is given in recognition of outstanding and innovative client service. He has also received the firm's Eagle Award for his outstanding contributions to the firm. Barry is a member of the panel of j g for The Wall Street Journals annual Technology y p judges gy Innovation Awards.
Barry Jaruzelski Partner
Booz - Innovation 1000 - IBF conf v3.ppt
For the past six years weve examined innovation spending and its link to performance
Progression of the Global Innovation 1000 Study
2005 2006 2007 2008 2009 2010
2005: Money I 't 2005 M Isn't Everything
2006: Smart S 2006 S t Spenders d
2007: The Customer 2007 Th C t Connection
2008: Beyond B d 2008 B d Borders
2009: Profits Down, 2009 P fit D Spending Steady
2010: How T 2010 H Top Innovators Keep Winning
In innovation, money doesnt buy results. y Ultimately, the process is more important than the amount spent.
High-Leverage Innovators, companies , p that outperformed their industry peers on a variety of financial performance metrics while spending less on R&D.
Two keys to success: aligning innovation g g strategy with overall corporate strategy & getting customers involved in the innovation process.
The global footprint of R&D. Companies that p conduct more than 60% of their R&D outside their home countries outperformed their peers
Despite a big drop in overall operating income, p g , more than two thirds of the companies we looked at closely either maintained or increased their spending on innovation.
Which innovation capabilities the top p p performing companies prioritize and how they are able to consistently outperform.
Booz & Company DATE
Innovation 1000 is ~1/2 of worlds $1 trillion spend on R&D
R&D Spend by Industry - 2009 p y y

Telecom Consumer Other Aerospace 2% 4% and Defense 2% 4% Software/ Internet 7% ($34B) Chemicals and Energy 7%
($37B)
R&D Spend by Region of HQ - 2009 p y g
$503B
Computing and Electronics 27%
($137B)
ROW India/China 5% 1%
Japan
($117B)
23%
38%
North America
($191B)
Industrials
($51B)
10%
22%
15%
Health
($113B)
32% Europe
($161B)
Auto
($73B)
Booz & Company DATE
Top 20 R&D spenders - ranks have shifted

2010 Rank 2009 Rank Company Roche Holding AG Microsoft Corp Nokia OYJ Toyota Motor Corp Pfizer Inc Novartis AG Johnson & Johnson Sanofi-Aventis SA GlaxoSmithKline PLC Samsung Electronics Co General Motors Co IBM Intel Corp Merck & Co Inc Volkswagen AG Siemens AG Cisco Systems Inc Panasonic Corp Honda Motor Co Ltd Ford Motor Co Geography Europe North America Europe Japan North America Europe North America Europe Europe ROW North America North America North America North America Europe Europe North America Japan Japan North America Health Software/Internet Computing and Electronics Auto Health Health Health Health Health Computing and Electronics Auto Computing and Electronics Computing and Electronics Health Auto Industries Computing and Electronics Computing and Electronics Auto Auto Industry %ge R&D Spend Change 2008 to 2009 2009 R&D Expenditure 2009 Sales Revenue Intensity 2009 R&D/Sales Change in Intensity FY 2008 to 2009
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
3 4 2 1 6 9 7 10 11 12 5 13 14 23 17 15 19 20 16 8
11.63% 10.36% -0.99% -19.77% -2.59% 3.49% -7.80% 7 80% 0.17% 12.69% 7.91% -25.00% -8.16% -1.21% 16.82% 3.58% 3.07% 1.07% -7.92% -17.74% -32.88% -3.67%
9,120 9,010 8,240 7,822 7,739 7,469 6,986 6 986 6,391 6,187 6,002 6,000 5,820 5,653 5,613 5,359 5,285 5,208 5,143 4,996 4,900 128,943
45,306 58,437 57,150 204,363 50,009 44,267 61,897 61 897 40,866 44,422 109,541 104,589 95,759 35,127 27,428 146,677 103,866 36,117 79,994 92,516 118,308 1,556,639
20.13% 15.42% 14.42% 3.83% 15.48% 16.87% 11.29% 11 29% 15.64% 13.93% 5.48% 5.74% 6.08% 16.09% 20.47% 3.65% 5.09% 14.42% 6.43% 5.40% 4.14% 8.28%
3.82% 14.11% 22.51% -13.09% -5.93% -3.07% -5.04% 5 04% -5.77% -3.26% -5.83% 6.83% -0.61% 5.71% 1.58% 12.07% 3.97% 10.65% -3.60% -4.01% -17.67% 3.61%
R&D Spend % Change >10% R&D Spend % Change < 0%
Total
Booz & Company DATE
This year we also asked executives: Who is the most innovative company? Apple, Google company? - Apple Google, and 3M came out on top
Top 10 Most Innovative Companies
Company 2009 R&D Spend ($ US Million) Innovation 1000 Rank 2009 Sales R&D ($ US Million) Intensity
Financial Performance of Most Innovative vs. Biggest Spenders gg p

80
Top 10 Most Innovative Top 10 Spenders
1 2 3 4 5 6 7 8 9
Apple Google G l 3M GE Toyota Microsoft P&G IBM Samsung
$1,333 $,2843 $ 2843 $1,293 $3,300 $7,822 $9,010 $2,044 $5,820 $6,002 $5,653
81 44 84 35 4 2 58 12 10 13
$42,905 $23,651 $23 651 $23,123 $155,777 $204,363 $58,437 $79,029 $95,759 $109,541 $35,127
3.1% 12.0% 12 0% 5.6% 2.1%
67 56
54
50
42
Industry Average Performance
3.8%
35
15.4% 2.6% 6.1% 5.5% 16.1%
Revenue Growth (5-Year CAGR)
Sources: Bloomberg data; 2010 Booz & Company Innovation 1000 survey
Booz & Company DATE Booz - Innovation 1000 - IBF conf v3.ppt
10 Intel
EBITDA as % of Revenue (5-Year Avg.)
Market Cap Growth (5-Year CAGR)
Year after year weve found that higher R&D spending doesnt ensure better performance
EXAMPLE ANALYSIS
The Performance Disconnect Example analysis showing link between R&D and financial performance ~10,000 analyses found NO statistical relationship between R&D spend and: Sales growth Gross profit growth Operating profit growth Operating Margin Net profit growth Net Margin Market cap growth Total shareholder return
-5
Indexed R&D / Sales Indexed Sales Growth
y = 0.032x + 1.2914 R2 = 0 0114 0.0114
0 0 1 2 3 4 5 6 7
Source: Booz & Company Global Innovation 1000, 2006

While R&D $s dont ensure performance, there is a minimum threshold you can be Too Rich or Too Thin Too Rich Too Thin
The Performance Disadvantage of the Bottom 10% of Spenders
1.9 1.7 1.7 1.9
Ind dexed Perfo ormance
Spending much less than industry median does lead to consistently lower performance Spending much more than industry median does not drive consistently better performance
1.0
1.0
Operating Profit Growth Index
Regionally Adjusted Shareholder Return Index
R&D to Sales Ratio

Indexed Bottom 10%
Indexed Middle 80%
Indexed Top 10% 7
Innovation process, tools & culture matter MORE than R&D $s

Aligning Innovation Strategy with Corporate Strategy Building the Best Global Network for Cost & Access Leveraging Customer Insight in Ideation Making the Right Bets Portfolio Management a age e t Managing the R&D Pipeline with Speed & Efficiency y
There are 3 fundamental innovation strategies:

Three Innovation Strategies Example Companies
Need Seekers
Consistently strive to be first movers; Proactively engage customers to determine needs and shape new innovations; Determine new innovations by surfacing unarticulated needs
~25%
Market Readers Adopt a 2nd mover

strategy; Focus on driving value through incremental change; New innovations determined market back, with equal focus on competitors and customers
~25%
Technology Drivers Drive

innovation via new technological achievement; Leverage technology for both incremental and breakthrough change. The least proactive of the three strategies in directly contacting customers.
~50% 50%
Top 25% performers tightly align on a priority set of capabilities

Capability Sets Identified as Key by Top 25% Performers in Each Innovation Strategy
Key for category of capability Ideation Project Selection Product Development Commercialization
Market Readers
Resource requirement management Supplier/partner engagement in the development process
Market potential assessment
Need Seekers
Directly generated, deep customer insights & analytics Enterprise-wide product launch
Rigorous decision making Application of technologies and trends to new products Translation of consumer and customer needs to product development Tech Drivers Customer engagement Product Platform Management Detailed understanding of Pilot selection/controlled roll-outs emerging technologies and trends
All Three
Open innovation Technical risk assessment
Product lifecycle management
Sources: Bloomberg data; 2010 Booz & Company Innovation 1000 survey
10
Top performers excel at some things, not everything

Relative Execution of Capabilities with the Innovation Value Chain
Percent of Companies Rating Performance 4 or 5 (on scale of 1-5)
Top 25%
Ideation Capabilities
Top 25% Bottom 25%
Project Selection Capabilities

79 64 43 46 25 57 57 39 31
Bottom 25% B tt
68 46 25 25 25 54 21
52
52
57
54
Supplier and distributor Independent engagement in ideation competitive insights from the marketplace
Open Innovation
Detailed understanding of emerging technologies/trends
Deep Consumer and Customer insights/analytics
Strategic disruption decision making & transition planning
Technical risk assessment / management
Rigorous decisionmaking around portfolio trade-offs
Project resource requirements forecasting and planning
On-going assessment of market potential
Product Development Capabilities

Top 25% Bottom 25%
Top 25%
Commercialization Capabilities
32 21 21 14 11 11 7 4
71 50 50 39 29 39
68
71
Bottom 25%
36 18
11 0
14
11
Reverse engineering
Supplier/partner engagement in the product development pr
Design for specific goals
Product platform management
Engagement with customers to prove real-world feasibility
Diverse user group management
Production ramp-Up
Regulatory/ government relationship management
Global, enterprise-wide product launch
Product lifecycle Pilot user selection management / controlled roll-outs
Booz & Company DATE
11
Companies that are highly coherent in their strategy & capabilities consistently outperform their peers biliti i t tl t f th i
5-YearMarket CAP CAGR Coherent Companies
Companies whose capability sets and strategies are tightly aligned are coherent They focus on the set of capabilities that drive performance in the marketplace They excel at execution of those capabilities Their innovation strategy and capabilities are aligned with biliti li d ith corporate strategy
Low to Moderately Coherent Companies
Note: Industry-normalized scores reflect the average percentile against your peers
5-Year EBITDA as % of Revenue

74
53 45
52
Peer Group Average
Highly Coherent Companies
Low to Moderately Coherent Companies
Highly Coherent Companies
12
Capability: Organizing for innovation requires balancing multiple dimensions of an inherently cross functional process cross-functional
Innovation Organization Dimensions and Natural Tensions Tensions
Products
Innovation is inherently a highly cross-functional, cross, organization activity While a Booz study found that >50% companies restructured their innovation organizations recently structure in itself is a poor predictor of organizational effectiveness
Geography
Customer
Engineering Functions
Operations
13
Decision rights & information flows are 2X more powerful in driving organizational effectiveness than motivators or structure
What Matters Most to Strategy & Innovation Execution
Information Flow
54
Decision Rights
50
Motivators
26
Structure
25
Average Strength Index Score (Out of 100)
Research shows that enterprises fail at execution by relying on structural reorganization reorganization, neglecting the more powerful drivers of effectiveness decision rights & information flow
14
Capability: Proactively managing innovation project portfolios via consistent ROI2 metrics i critical i t t t i is iti l
Innovation Effectiveness Curve
Return on Innovation Investment ROI2
Current Innovation Curve
Raised Innovation Curve C
The Innovation Effectiveness Curve is an indicator of a firms innovation capability and future growth prospects Area under the curve is the total Return On Innovation Investments The larger area under the curve, the greater the firms returns on innovation investments
Innovation ti Project (k)
Project (k) ROI2
Investment in Project (k) Healthy Innovation Projects Total Innovation Investments

Tail
15
Best results come from launching A LOT of ideas into pipeline; then ruthlessly terminating low potential ones
Funnel vs. Tunnel: HIGH number of ideas tried & LARGE portion terminated
60%
Screening at Ideation & Termination Within the Pipeline

Low Value Model Target Zone
% of Ideas Approved s d as Pro ojects
50% 40% 30% 20%

High Performance
Tunnel, Not a Funnel
Low Output Model
10% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Mid Range Mid-Range Lower
No. No of Annual Projects Discontinued as Percentage of Total No. of Projects

16
Capability: customer insight is foundation of innovation success p y g

Combining Customer Insight with Innovation Effectiveness
Market Back
Innovation Approach
Product Focused None / Passive Customer Insight Approach Active / Aggressive
Source: Booz & Co. Global Innovation 1000, 2006

17
Companies who deeply & directly engage end users have superior results regardless of innovation strategy
Direct Customer Engagement vs. Indirect Customer Insight Approach
Median Index Values of OI Growth, Total Shareholder Return and ROA ,
1.6 1.5
Industry Indexed Median Value I
1.4 1.2 1.0 1 0.8 0.6
Companies that directly engage their customers had >3x higher OI growth, 65% higher TSR, and 2x ROA TSR
0.7 0.4
0.7
0.4 0.2 0
Direct Customer Engagement
0.3
Indirect Insight Approach
Operating Income CAGR C G 3Y O
3Y Total S Shareholder Return
3Y Return on Assets
Note: Direct Engagement represents scores of 1 or 2; Indirect Insight represents scores of 3,4, 5 Source: Booz & Co. Analysis
18
Capability: successful Open Innovation depends on systematic process and supportive culture
Closed Innovation
Boundary of the Company
Factors Driving Open Innovation Increasingly mobile trained workers More capable universities Open Innovation
Boundary of the Company New Market Current Market
Research Projects
The Market
Research
Development
Increased availability of y low cost communication channels Erosion of oligopoly market positions Enormous increase in Venture Capital funding
Research R h Projects
Research
Development
19
Example: Apple created the iPod in just 6 months leveraging an open innovation process & culture --- no NIH syndrome NIH
Carte blanche to hire partners & team Steve Jobs takes personal interest An entrepreneur with an idea comes to Apple
iPod
35 person team from Philips, IDEO, General Magic, Apple, Connectix and WebTV to develop the iPod
PortalPlayer manages technical design and earns annuity revenue stream
iPod critical success factors:

Business system innovation Openness of development process Fast decision making Iterative collaborative relationship with PortalPlayer and other partners
6 months th
Source: Booz & Co
20
Key Takeaways
While innovation spending level is not correlated with financial performance, weve determined strategy, talent & process do influence results There are 3 distinct innovation strategies, all of which can be successful Coherence between innovation strategies and priority capabilities is critical A rigorous innovation funnel is superior to a tunnel portfolio model Clearly defined decision rights and information flows rather than structure are key organizational enablers Deep customer & end user understanding provides real advantage Open innovation can create a continuous flow of ideas and technology
21
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Booz & Company

Newport Beach, CA, February 17, 2011

How the Top Innovators Keep p p Winning

Barry Jaruzelski Partner

Booz - Innovation 1000 - IBF conf v3.ppt

2005: Money I 't 2005 M Isn't Everything

2006: Smart S 2006 S t Spenders d

2007: The Customer 2007 Th C t Connection

2008: Beyond B d 2008 B d Borders

2009: Profits Down, 2009 P fit D Spending Steady

2010: How T 2010 H Top Innovators Keep Winning

Booz & Company DATE

Booz - Innovation 1000 - IBF conf v3.ppt

Innovation 1000 is ~1/2 of worlds $1 trillion spend on R&D

R&D Spend by Industry - 2009 p y y

R&D Spend by Region of HQ - 2009 p y g

Booz & Company DATE

Booz - Innovation 1000 - IBF conf v3.ppt

Top 20 R&D spenders - ranks have shifted

R&D Spend % Change >10% R&D Spend % Change < 0%

Booz & Company DATE

Booz - Innovation 1000 - IBF conf v3.ppt

Financial Performance of Most Innovative vs. Biggest Spenders gg p

Apple Google G l 3M GE Toyota Microsoft P&G IBM Samsung

3.1% 12.0% 12 0% 5.6% 2.1%

EBITDA as % of Revenue (5-Year Avg.)

Market Cap Growth (5-Year CAGR)

y = 0.032x + 1.2914 R2 = 0 0114 0.0114

Source: Booz & Company Global Innovation 1000, 2006

Ind dexed Perfo ormance

Operating Profit Growth Index

Regionally Adjusted Shareholder Return Index

R&D to Sales Ratio

Indexed Middle 80%

Indexed Top 10% 7

Innovation process, tools & culture matter MORE than R&D $s

Booz - Innovation 1000 - IBF conf v3.ppt

There are 3 fundamental innovation strategies:

Market Readers Adopt a 2nd mover

Technology Drivers Drive

Top 25% performers tightly align on a priority set of capabilities

Market potential assessment

Open innovation Technical risk assessment

Product lifecycle management

Top performers excel at some things, not everything

Project Selection Capabilities

Detailed understanding of emerging technologies/trends

Deep Consumer and Customer insights/analytics

Strategic disruption decision making & transition planning

Technical risk assessment / management

Rigorous decisionmaking around portfolio trade-offs

Project resource requirements forecasting and planning

On-going assessment of market potential

Product Development Capabilities

Supplier/partner engagement in the product development pr

Design for specific goals

Product platform management

Engagement with customers to prove real-world feasibility

Diverse user group management

Regulatory/ government relationship management

Global, enterprise-wide product launch

Product lifecycle Pilot user selection management / controlled roll-outs

Booz & Company DATE