INNOVATION FOR GROWTH

1. INNOVATION FOR GROWTH KNOWLEDGE FOR INNOVATION Professor George Day

2. The Organic Growth Challenge • Organic growth is at the top of CEO agendas in 4 of 5 public companies • Only 29% of senior managers in large-cap firms were highly confident they would reach their organic growth target* Topics • Why is superior organic growth hard to sustain? • Managing organic growth as a strategic process • Balancing risk and reward in an innovation portfolio • Building an innovation capability • Supported by a robust culture • * 65% of these managers were only “somewhat” or “not at all” confident about their ability to stimulate innovation (McKinsey Global Survey, October 2007.) 2

3. The Innovation Spectrum small i BIG I Exploitation Incremental innovation Red Ocean Low risk – small rewards Exploration Discontinuous/disruptive Blue Ocean High risk – large rewards Innovation* is the design, invention, development and/or implementation of new or altered products, services, systems or business models for the purpose of creating new value for customers and financial returns for the firm *Advisory committee on Measuring Innovation in the 21st Century Economy

4. How small i Displaces Big I Innovation • Ambitious growth objectives are not supported with resource commitments • Short-term incentives subvert long-term objectives • Urgent demands from customers and salespeople absorb scarce development resources • Lack of accountability when growth targets are missed • Payoffs from BIG I innovations are risky and distant 4

5. Balancing Risk and Reward along the Growth Path New to Company Adjacent Present P(F)=.60-.75 P(F)=.75-.95 P(f)=.45-.60 BIG I Product/ Technology P(F)=.40-.50 Expansion into adjacencies Small i P(F)=.25-.40 Present Adjacent New to Company End-Use Market* P(F) = Probability of Failure *Market means customers, not geographies

6. MEETING THE GROWTH CHALLENGE: GE’s “Imagination Breakthrough” Program Set stretch goals for organic growth • Growth rate target boosted from 5% to 8% per year • Signal commitment with resources Align the organization to growth • Growth leaders vs. professional managers • Diversify top ranks and cut mobility • Tie incentives to innovation • Assign lead role to marketing team in each business • Invest in organizational capabilities Manage growth as a disciplined process 6

7. MEETING THE GROWTH CHALLENGE: Building an Organizational Capability Lesson One: A supportive culture is the most essential ingredient: • Ensuring organizational alignment • Accelerating execution 7

8. MEETING THE GROWTH CHALLENGE: Attributes of Innovative Cultures Perceived Importance of Cultural Attributes Strong identification with the customer and an overall orientation toward the customer experience Passion for and pride in the products and services offered Reverence and respect for technical talent and knowledge Openness to new ideas from customers, suppliers, competitors, and other industries Culture of collaboration across functions and geographies Sense of personal accountability for any and all contributions to the innovation and product development process Tolerance for failure in the innovation process MEAN RANKING OF IMPORTANCE 0 0.1 0.2 0.3 0.4 0.5 0.6 8 Source: Booz & Company (2011 survey of 600 senior managers and R&D professionals in 400 companies

9. MEETING THE GROWTH CHALLENGE: Building an Organizational Capability Lesson One: A supportive culture is the most essential ingredient: • Ensuring organizational alignment • Accelerating execution Lesson Two: It takes growth leaders to realize ambitious growth objectives: • Willingness to take risks 9

10. MEETING THE GROWTH CHALLENGE: Attributes of Growth Leaders Operational Leaders Growth Leaders

11. Growth Traits of GE Leaders • “Creates an external focus that defines success in market/industry terms… • Is a clear thinker who can simplify strategy into specific actions… • Has imagination and courage to take risks on both people and ideas… • Can energize teams through inclusiveness and connections with people… • Develops expertise in a function or domain, using depth of knowledge as a source of confidence to drive change.”

12. MEETING THE GROWTH CHALLENGE: Building an Organizational Capability Lesson One: A supportive culture is the most essential ingredient: • Ensuring organizational alignment • Accelerating execution Lesson Two: It takes growth leaders to realize ambitious growth objectives: • Willingness to take risks Lesson Three: Highest payoff areas of investment in organizational capabilities are: Designing organization structures to address weak links in the innovation process Aligning metrics with individual and group incentives Nurturing open networks of partners that extend the innovation capability 12

13. Organizing to Innovate

14. Organizing to Innovate

15. Pitfall One: Emphasizing results over diagnostic insights • Using what is available versus needed • Pitfall Two: Encouraging small i innovation • Susceptibility to gaming and manipulation • Pitfall Three: Lack of accountability for moving the innovation dial • Individual incentives are not linked to improving some aspect of innovation process MEETING THE GROWTH CHALLENGE: Avoiding Innovation Metrics Pitfalls • *Source: Joint Wharton-McKinsey study of innovation metrics (November 2008)