The Most Innovative Companies 2015

The Most Innovative Companies 2015 FOUR FACTORS THAT DIFFERENTIATE LEADERS The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please visit bcg.com. THE MOST INNOVATIVE COMPANIES 2015

FOUR FACTORS THAT DIFFERENTIATE LEADERS

MICHAEL RINGEL

ANDREW TAYLOR

HADI ZABLIT

december 2015 | The Boston Consulting Group CONTENTS

3 INNOVATION IN 2015 The 50 Most Innovative Companies High-Impact Factors “An Innovation Agenda” Modifying the Methodology

7 THE RISING NEED FOR INNOVATION SPEED The Benefits of Speed Designing the System for Speed

11 STRONG INNOVATORS ARE LEAN INNOVATORS Managing the Unmanageable Doing the Work Right…and the Right Work

15 ENABLING TECHNOLOGY-ENABLED INNOVATION Multipurpose Platforms How to Get There

18 THE PREREQUISITES OF PROFITABLE ADJACENT GROWTH Explore Demand-Centric Growth Cultivate a New Organization with New Talent Employ Separate Governance Adopt an Experimental Approach Build the Right Cultural Enablers Learning from the Masters It’s Not All or Nothing

21 APPENDIX

22 NOTE TO THE READER

2 | The Most Innovative Companies 2015 INNOVATION IN 2015

nnovation continues to rise in impor- question in 2005, when 66% said innovation Itance. In The Boston Consulting Group’s was their top or among their three top tenth annual global survey of the state of priorities. (See Exhibit 1.) At the same time, innovation, 79% of respondents ranked science and technology continue to be seen innovation as either the top-most priority or as increasingly important underpinnings of a top-three priority at their company, the innovation, enabling four attributes that highest percentage since we began asking the many executives identify as critical: an

Exhibit 1 | Innovation Remains at the Top of Most Companies’ Agendas

WHERE DOES INNOVATION/PRODUCT DEVELOPMENT RANK AMONG YOUR COMPANY’S TOP STRATEGIC PRIORITIES? % respondents CAGR 2% 79 80 77 76 75 72 72 66 66 66 64 60 32 52 53 57 Top-three 45 53 priority 43 43 39 47 40

20 40

23 23 25 26 24 24 19 22 22 Top priority

0 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015

Source: BCG Global Innovation Survey, 2005–2015. Note: BCG did not conduct a survey in 2011. Because of rounding, not all numbers add up to the totals shown.

The Boston Consulting Group | 3 emphasis on speed, well-run (and very often with lean R&D in the pharmaceutical indus- lean) R&D processes, the use of technological try round out the top ten. platforms, and the systematic exploration of adjacent markets. Given the strong impact of technological de- velopments such as mobile technology and The importance of these four attributes— social media in the last decade, one might ex- and of science and technology in general—is pect technology companies to have shoved not new. Looking back over our surveys of aside their more traditional counterparts. Yet the last ten years, we see that the companies we still see plenty of traditional companies that made the list of the 50 most innovative on the list. They, too, have used technological companies in at least nine out of ten of advances to their own innovative ends. Five them—Apple, Google, Microsoft, Samsung, of the top ten companies in 2015 are nontech Toyota, BMW, Amazon, IBM, Hewlett-Pack- companies (although one, Tesla Motors, ard, General Electric, Cisco Systems, Nike, bridges a couple of sectors)—the same num- Sony, Intel, Procter & Gamble, and ber as in our first survey ten years ago. On Walmart—are all strongly associated with the larger list of the 50 most innovative com- many of those capabilities. panies, 38 (76%) are nontech companies.

The top 50 list is a global group: 29 compa- The 50 Most Innovative Companies nies from the US, 11 from Europe, and 10 The importance of these attributes can also from Asia. Emerging markets also make their be seen in this year’s list. (See Exhibit 2.) Ap- presence felt: there are three companies from ple and Google again hold the top two spots. China and one from India. Tesla Motors, which has been moving up the list at the speed of one of its Model S sedans, reached number three. Fast-tech companies, High-Impact Factors tech-savvy automakers, and a company that The four attributes that fuel innovation are exemplifies scientific expertise combined interrelated, of course, so it’s hard to examine

Exhibit 2 | 2015 Most Innovative Companies

1. Apple 18. The Walt Disney Company 35. V olkswagen 2. G oogle 19. Marriott International 36. Visa 3. T esla Motors 20. Johnson & Johnson 37. DuPont 4. Microso Corp. 21. Netﬂix 38. Hitachi 5. Samsung Group 22. AXA 39. R oche 6. Toyota 23. Hewlett-Packard 40. 3M 7. BMW 24. Amgen 41. NEC 8. Gilead Sciences 25. Allianz 42. Medtronic 9. Amazon 26. Tata Motors 43. JPMorgan Chase 10. Daimler 27. General Electric 44. Pﬁzer 11. Bay er 28. F acebook 45. Huawei 12. T encent 29. B ASF 46. Nike 13. IBM 30. Siemens 47. B T Group 14. SoBank 31. C isco Systems 48. Master Card 15. F ast Retailing 32. Dow Chemical Company 49. Salesf orce.com 16. Yahoo! 33. R enault 50. L enovo 17. Biogen 34. Fidelity Investments

Source: BCG Global Innovation Survey, 2015.

4 | The Most Innovative Companies 2015 one in any depth without running into anoth- cient and not slow down. Gilead has shown it er. Speed has long been a priority and is one is not afraid to pursue adjacent openings of the major sources of differentiation for when it sees a high-value opportunity—as ev- true breakthrough innovators, as we dis- idenced by its shift into HCV. John Milligan, cussed last year. In fact, the percentage of re- Gilead’s president and COO, put it this way in spondents in 2015 citing the importance of an interview with BCG: “I don’t think of Gile- quickly adopting new technologies jumped ad as having a growth agenda; we have an in- 22% over 2014. novation agenda—we spend a lot of time thinking about how to make better medicines Lean R&D processes have a major effect on for tomorrow, and that innovation then drives speed—as well as on multiple other areas. No growth.” surprise, then, that the percentage of respondents citing improvements in operating processes as crucial to innovation increased this Speed is one of the major year. Lean methodologies that were originally developed for manufacturing are now being sources of differentiation for applied in a sophisticated manner to R&D and new-product development, and they are true breakthrough innovators. having a big and growing impact in such industries as industrial goods, health care, and high tech. Gilead’s innovative capabilities stem from a management team that combines exception- In most companies, technology used to live in ally deep scientific and technical expertise in its own silo—the IT department. Today, digi- its area of focus with an equally deep knowl- tal, mobile, big data, and other technologies edge of market needs. The result is a remark- are used to support and enable innovation able ability to identify major potential ad- across the organization, from new-product de- vances in treating serious illnesses and the velopment to manufacturing to go-to-market conviction to pursue them, regardless of strategies in multiple industries. whether the essential science has been developed internally or externally. Gilead couples Finally, many companies facing slow growth scientific rigor with strong senior-manage- in their core businesses are looking to ex- ment cohesion and the courage to pursue pand into adjacent markets. To do so, they high-risk, high-return initiatives. The compa- frequently leverage existing capabilities in ny’s 2011 acquisition of Pharmasset for lean, speed, and technology platforms to en- $11 billion (almost one-third of Gilead’s mar- able innovations, whether next door or fur- ket value at the time) was pivotal in the de- ther afield. velopment of Sovaldi and Harvoni, treat- ments for hepatitis C that cure more than nine out of ten patients with the most com- “An Innovation Agenda” mon type of the disease, leaving them with Innovation is one of a handful of growth no detectable virus. At the same time, the strategies that companies employ. At a few company has pioneered innovative R&D and companies, it’s the primary strategy. One of manufacturing models, such as licensing these is Gilead Sciences, which joins the 50 agreements with India-based manufacturers most innovative companies list this year at of generic drugs, to expand access to its drugs number eight. Gilead has developed a cure in developing markets. for one major disease, hepatitis C (HCV), while significantly advancing treatment of another, HIV infection. Modifying the Methodology Over the years, we have from time to time Gilead exemplifies the attributes we examine improved our survey methodology. This year, in this year’s report. As its annual sales ap- we made two modifications. One is predicat- proach $30 billion, the company is deter- ed on the belief that the experts in an indus- mined to keep its innovation processes effi- try often spot an innovative company before

The Boston Consulting Group | 5 it becomes widely known. So in addition to nnovation remains a top priority, and it asking about innovation generally, this year Idoesn’t get any easier. Below we look in we also asked our 1,500 survey respondents depth at each of the four attributes that can to rank innovators within their own indus- make innovation more successful. Some com- tries. We assigned this “internal” ranking an panies are already good at some; some are overall weighting of 30%, the same given to better at others. Taken together, these four all other industry responses. The second capabilities provide a series of practical steps change was to increase the weighting of five- that any company can take if it wants to raise year TSR to 40% in order to better balance its innovation game. objective and subjective measures. The result, as we expected, is a more diverse list that includes more companies that don’t market widely to the public but are nevertheless seen as highly innovative within their industries—and that are reaping the rewards of this capability.

6 | The Most Innovative Companies 2015 THE RISING NEED FOR INNOVATION SPEED

ize can give you scale, but for One example is fashion retailer Zara, part of “Sinnovation, speed is more critical,” the Inditex Group, the world’s largest apparel says Rakesh Kapoor, CEO of Reckitt seller. Zara lives by speed. The typical fashion Benckiser, the breakthrough-innovator retailer is organized around individual func- consumer products company that BCG tions to gain scale and cost advantages; as a profiled last year. Speed has long been seen result, product development, manufacturing, as an important attribute of strong innova- and delivery take months. Zara gets new tors. The results of our 2015 survey, as well as styles to market in two to four weeks. To do our recent work with clients, indicate that its so, it uses a cross-functional, integrated orga- importance is rising fast. (See Exhibit 3.) nization to accelerate decision-making and Speed enables companies to catch consumer eliminate delays in functional handoffs. De- trends as they emerge, leave competitors sign, procurement, manufacturing, and deliv- flat-footed, and even drive costs down and ery are all organized into teams that work quality up. closely with store managers to quicken re- sponsiveness to shifting market trends. Team In this year’s survey, overly long development performance is assessed on the basis of com- times were the most-cited obstacle to gener- mon metrics and incentives that focus on go- ating returns on innovation and product de- to-market speed and rapid lead times. As the velopment; 42% of global innovation execu- former CEO of Inditex, José Maria Castellano, tives said development times are too long—a puts it, “This business is all about reducing 6 percentage point increase over 2014. (See response time. In fashion, stock is like food. It Exhibit 4.) The same frustration is shared by goes bad quick.” strong, average, and weak innovators in roughly equal measure, but there the similari- ties end. The Benefits of Speed Increasing speed to market leads to numerous Fast innovators are much more likely to also financial and nonfinancial benefits. Greater be strong innovators—42% compared with agility has the potential to boost a company’s less than 10% of slow innovators. Fast innova- top and bottom lines, and flexible and mobile tors are more disruptive—27% versus 1.5%. consumers demand it. The financial benefits They get new products to market quickly and are often directly measurable and vastly ex- generate more sales from them (at least 30% ceed the up-front costs of introducing speed- of revenue). This is true for 35% of fast inno- to-market approaches to the organization. vators but for only 11% of slower ones. Some examples of the benefits of speed:

The Boston Consulting Group | 7 Exhibit 3 | Speed of Adoption Increased in Importance in 2015

WHICH OF THE FOLLOWING AREAS OF INNOVATION/R&D/PRODUCT DEVELOPMENT WILL HAVE THE MOST IMPACT ON YOUR INDUSTRY OVER THE NEXT THREE TO FIVE YEARS? Change in % respondents citing signiﬁcant impact, 2014-2015 30

22 20

10 9 8 5

0 –1 –4 –5 –5 –6 –7 –8 –10 –10 –12 –15 –20 Speed of Technology Extension New Customer Marketing Extension adopting platforms of existing products channel of existing new tech products services Big-data Operations Digital Mobile Business New Supporting analytics process design products/ model service capabilities capabilities

Source: BCG Global Innovation Survey, 2014, 2015.

Exhibit 4 | Long Development Times Remain the Biggest Obstacle to Returns on Innovation

WHAT ARE THE BIGGEST OBSTACLES YOU FACE WHEN IT COMES TO GENERATING A RETURN ON YOUR INVESTMENTS IN INNOVATION/PRODUCT DEVELOPMENT?

% respondents 50

2014 2015 42 40 36 32 30 31 30 25 25 25 23 22 20 20 18 19 18 15 14 12 12 10 11 10

0 Development Risk-averse Not enough Not enough Leadership times are too culture great ideas customer commitment long insight Selecting the Lack of Marketing Can’t measure Compensation right ideas to coordination innovations performance not tied to commercialize well innovation Source: BCG Global Innovation Survey, 2014, 2015.

8 | The Most Innovative Companies 2015 •• Faster Innovation. Companies that are panies develop new products and services, built for speed often realize first-mover and the rate at which they deliver those prod- advantages; they are able to react more ucts and services to market. Some companies quickly to competitors’ moves or market emphasize one or the other; for example, in- shifts with their own product innovations. novation leaders stress development and fast followers focus on delivery. That said, compa- •• Lower Development Costs. Streamlined nies that have designed their systems, organi- processes, limited iterations, and reduced zations, processes, and cultures for speed in slack release financial and operating either context tend to have four things in resources for other value-adding activities. common: they apply lean processes, prototype and iterate, have dedicated innovation •• Larger Market Share. A product that gets staff, and follow the right metrics. to market early is less likely to face initial competition. A quick introduction also •• Apply lean processes. The lean philoso- gives a product more time to build market phy emphasizes speed as much as it does share before it declines into a commodity. quality, efficiency, and elimination of waste. This year, for the first time, we •• Greater Forecasting Accuracy. Because asked our survey respondents to rate their the time between product design and companies’ innovation and product product release is shorter, executives may development activities on 12 dimensions be more willing to green-light trendy related to lean and efficient product products that would otherwise be denied. development, including short cycles and iterations, standardized processes, and the quick modeling and testing of designs. Designing the System for Speed (See Exhibit 5.) When we segmented the From an innovation perspective, there are responses by self-described strong and fast two aspects to speed: the rate at which com- innovators, we found a close correlation

Exhibit 5 | Fast Innovators Apply Lean Processes

MY COMPANY’S INNOVATION/R&D/PRODUCT DEVELOPMENT PROCESS EXHIBITS THE FOLLOWING DIMENSIONS RELATED TO LEAN AND EFFICIENT PRODUCT DEVELOPMENT Agree or strongly agree (%) 100

Fast innovators Strong innovators 87 85 83 82 83 82 81 80 80 80 77 77 78 78 79 78 77 78 77 78 78 74 74 74 75

0 Deﬁned Parallel Short cycles Strong project Systematic Global product development and iterations manager cross-functional knowledge speciﬁcations with stringent integration management funnel system Modularized Intelligent Standardized Meaningful Accepts failure Designs quickly product lines launch plan processes KPIs modeled and tested Source: BCG Global Innovation Survey, 2015.

The Boston Consulting Group | 9 between these two groups—and a high innovation will take place. But if it’s 100% degree of employment by both of lean of 10 people’s job, things will start to principles across all 12 dimensions. happen. Speed is partly born of the (Separate BCG research corroborates priority that is put on it, so assigning— these results: the companies that deploy and incentivizing—a dedicated team with the principles of lean R&D reduce time- the job of moving fast is an essential lines by double-digit percentages, as well organizational move. Strong innovators as increasing efficiency and overall value. put committed muscle behind reducing For more on how they have achieved the time to market: they create fast-track these results, see “Strong Innovators Are programs, their own special processes, Lean Innovators,” below.) dedicated production capacity, established toolboxes (designed for speed), and teams. •• Prototype—to get customer input fast. Typically they are able to reduce time to Many companies wait until a new product market by a factor of four. is perfected before designing an elaborate launch. Fast innovators test prototypes •• Set and follow the right metrics. We are with customers, worrying less about the what we measure, but companies too imperfections that they know are there often measure the wrong thing. Metrics and focusing more on the insights they that put the emphasis on incremental may gain from consumer reactions and progress, or progress against a single feedback. These are incorporated quickly component of a larger whole, can cause in the next design iteration, and another individuals and teams to focus on their prototype is developed and tested. Using particular tree while losing sight of the an adaptive approach, good innovation forest. The best-performing innovators systems take advantage of the experience measure and incentivize teams on their curve to speed up the entire process. They overall achievement of company goals. also fail fast and fail cheap—cutting losses sooner than a standard innovation playbook might suggest and limiting the ast innovators have long demonstrated waste created by going too far down Fthat shortening innovation and product unproductive paths. It’s an approach that development cycles and reducing time to may sound intuitive and simple, but it’s a market can be a powerful source of competi- difficult one for many large organizations tive advantage. But a growing emphasis on to implement, since it runs counter to speed, even among companies that are almost entrenched corporate cultures. ready fast, suggests that a new realization is dawning: the demand for speed is itself in- •• Dedicate people and resources to the creasing. task. Experts debate the benefits of centralized versus decentralized innovation organizations (respondents to our survey were split as well), but what’s most important is to have dedicated capacity. If innovation is 10% of 100 people’s responsibility, you can guarantee that little

10 | The Most Innovative Companies 2015 STRONG INNOVATORS ARE LEAN INNOVATORS

epartment store magnate John fettered from creating the value they are ca- DWanamaker’s famous lament, “Half the pable of delivering. money I spend on advertising is wasted; the trouble is I don’t know which half,” could Yet the data is unequivocal—and compelling. easily be applied to R&D and new-product In this year’s survey, we asked respondents development. And when annual R&D for the first time to rate their companies’ in- spending reaches $1 billion, $5 billion, novation and product development activities $10 billion or more, the amounts being on 12 dimensions related to lean and effi- “wasted” get very big, very fast. cient product development, including short cycles and iterations, standardized processes, It’s not that companies are profligate, of and the quick modeling and testing of de- course; creative functions such as new-prod- signs. The overall responses were roughly uct development are never 100% efficient, 50% to 60% positive. But when we segmented and they involve a certain amount of trial, them by strong versus weak innovators, the error, and, inevitably, failure. But the fact is percentage of strong innovators following that some companies are considerably more lean principles jumped to 74% or more—on successful at R&D than others, and having every single dimension. Strong innovators are strong processes in place is one of the four at- two to three times more likely to adhere to tributes that executives say are critical to suc- lean principles than their weak counterparts. cess. What can companies do to improve their (See Exhibit 6.) R&D processes? The impact can be substantial. Separate BCG research has shown that the companies that Managing the Unmanageable are first to master lean R&D methodologies It seems almost counterintuitive that strong gain significant competitive advantages by innovators would emphasize process. After developing higher-quality products up to six all, R&D is a creative function, and too much months sooner than their competitors, while process management runs the risk of also reducing deviations from product target squelching the very creativity that is the life- costs by more than 35%. Moreover, in our ex- blood of innovation. The conventional wis- perience, when organizations apply the prin- dom is that the best creative minds want ciples of lean process improvement custom- freedom, and any sort of process manage- ized for the creative process of R&D, the ment represents manacles that either drive typical result is a 15% to 20% improvement in them away or, worse, keep them onboard but R&D productivity.

The Boston Consulting Group | 11 Exhibit 6 | Strong Innovators Excel at Lean Methodologies

MY COMPANY'S INNOVATION/R&D/PRODUCT DEVELOPMENT PROCESS EXHIBITS THE FOLLOWING DIMENSIONS RELATED TO LEAN AND EFFICIENT PRODUCT DEVELOPMENT Agree or strongly agree (%) 100

Strong innovators Weak innovators 83 85 80 80 77 79 77 78 78 74 74 74 75

60 Average ratio: 2:5 43 40 37 36 33 34 35 30 28 30 28 28 24 20

0 Deﬁned Parallel Short cycles Strong Systematic Global product development and iterations project cross-functional knowledge speciﬁcations with stringent manager integration management funnel system Modularized Intelligent Standardized Meaningful Accepts Designs quickly product lines launch plan processes KPIs failure modeled and tested

Source: BCG Global Innovation Survey, 2015.

This isn’t to say that these companies focus •• Planning, Scheduling, and Approval: solely on efficiency in the narrow sense of avoiding late or inadequate planning, lack per unit cost. In R&D, being productive is as of sequence in scheduling, and unclear or much about being smart about which bets to overly iterative approval processes make—à la John Wanamaker—as it is about pursuing those bets efficiently. But the best •• Standardization and Automation: companies put a process in place that enables minimizing variation and maximizing good decision-making as well as good execu- efficiency tion. (See The Lean Advantage in Engineering: Developing Better Products Faster and More Effi- •• Role Clarity and Scalability: ensuring ciently, BCG Focus, April 2015.) coordination and consolidation of key functions for critical mass and the reuse of assets and information Doing the Work Right…and the Right Work •• In-house Expertise: building and main- This two-fold focus of process design—on ex- taining expertise and properly deploying ecution as well as on decision-making—is scarce resources captured by the mantra, “Do the work right, and do the right work.” (See Exhibit 7.) Do •• Sourcing and Geographic Distribution: the work right is all about the process of exe- pursuing the proper use of outsourcing cution, and it involves the same principles and offshoring with the right level of that are core to the lean approach in manu- oversight facturing and other domains: eliminating waste, reducing costs, shortening timelines, •• Metrics, Monitoring, and Feedback: improving quality, and increasing efficiency. maintaining transparency on costs and The best companies have designed processes other metrics, and actively monitoring to that focus on the following aspects of execution: drive responsive feedback loops

12 | The Most Innovative Companies 2015 It’s in doing the right work, however, that but that trade-off decisions are made at a R&D departs from lean as it applies to other level above the units being evaluated. domains. This is all about the process of decision-making, and it takes on far more impor- •• Courage. They are willing to make big tance in R&D because R&D is by nature a bets, they don’t revisit decisions unless learning enterprise in which the freedom to circumstances change, and they ban follow untested hypotheses and hunches is appeals outside the process. critical. •• Attention to Cultural Issues That Promote Optimism Bias. They measure The best companies pay expert contributions by how much the input facilitates the governing body’s attention to cultural issues decision-making, thereby rewarding that promote optimism bias. unbiased input. •• Real Differentiation in Investment Profiles. They identify the projects that Companies need to make all kinds of choices, should proceed at full speed, the ones that such as which requirements to build into the require staged investment in order to gain target product profile, how best to pursue de- a better understanding of the risks, and velopment for a given project, whether to run the ones that need more analysis in order similar projects in sequence or in parallel, to answer key questions. These decisions what priority to give projects that are com- are clearly communicated across the peting for scarce resources, and—in the ulti- organization. mate test of decision-making—when to call it a day and terminate a failing project. •• Measurement on ROI. They avoid pushing through projects just to meet All these decisions can be challenging, not quotas or targets. They allow no unfunded just because of the inherent uncertainties in mandates. All decisions are tied to budget exploring the unknown, but also because the implications. information necessary to make decisions is often held by specialists across multiple tech- To bring this two-fold focus on process excel- nical disciplines. It can be hard for a single lence in decision-making and execution to individual or governance committee to have life, consider the example of a European au- the expertise required to synthesize inputs tomotive OEM for which adopting lean meth- from these disparate sources. This difficulty is odology meant staying among the industry exacerbated when the providers of the infor- front-runners in cycle time. In doing the work mation have vested interests—such as job se- right, the company addressed high R&D curity, the desire to make a breakthrough, or spending during physical testing, the last the ability to work in a discipline of inter- phase of development. It invested in ensuring est—that may promote (even unintentional- prevalidation of designs using digital tools be- ly) optimism bias in their evaluations. fore physical testing and then extended this methodology back to suppliers. The cost of The best companies focus as strongly on im- prototyping was cut in half, and the number proving the process of decision-making to off- of specification changes per component set this potential bias as they do on the pro- dropped by a staggering 75%. cess of execution. The principles they deploy include: As to doing the right work, given that only 15% of a vehicle’s technical specifications ac- •• Optimization Not Suboptimization. tually result in meaningful differentiation for They avoid the temptation in large consumers, the question—again à la John organizations to “push decisions down,” Wanamaker—was which 15%. This OEM instead ensuring that those closest to a made a significant investment in determining project have the ability to provide input the attributes that consumers recognize as

The Boston Consulting Group | 13 Exhibit 7 | The Key Levers of R&D Improvement

IMPROVE SKELETON IMPROVE NERVOUS SYSTEM

PRODUCT PROCESSES LEADERSHIP ENABLEMENT AND BEHAVIOR AND TOOLS

DO THE Modularized Flexible Cross-functional Speed-supporting WORK RIGHT product design workload leveling collaboration tools

Sequencing and Empowered project reduced bottlenecks management

DO THE Transparent product Solution-oriented Proactive handling of Experience- and RIGHT WORK requirements design sets uncertainty expertise-driven development Agile, fast-cycled Fact-based fast process cycle steering

Source: BCG analysis.

differentiating. It then did the hard work of velopment programs are looking at a journey translating those attributes into a technical that is likely to be measured in years. But for roadmap that enabled the R&D department those that depend on innovation for growth, to focus its resources on the right 15%. and back that dependence with budgets in the billions, the combination of cost savings and improved efficacy make it a journey well ean methodologies in R&D are not imple- worth taking. Lmented overnight, nor is a culture that embraces lean principles and processes created in weeks or months. Companies that want to truly transform their R&D and product de-

14 | The Most Innovative Companies 2015 ENABLING TECHNOLOGY- ENABLED INNOVATION

ew tools can make a big difference, the creation of new types of products and Nand across all industries, new technolo- services. gies, especially digital and data-based technologies, are powerful tools. At leading Take the example of General Electric, which companies, technology is evolving from a used the new technology of additive manu- functional silo to a foundation for break- facturing (also known as 3-D printing) to re- through innovation in products, services, and duce the cost of manufacturing transducer business models. probes, the most expensive component in ultrasound equipment. This innovation re- In this year’s survey, advances in technology sulted in both significant efficiencies and platforms ranked as the most important fac- more flexible production lines, driving down tor driving innovation, and big-data analytics costs, which, in turn, led to uses of the tech- was not far behind. (See Exhibit 8.) This isn’t nology where price had previously been pro- just lip service: more than half of those who hibitive, such as in inspection equipment for see tech platforms and big data as having a industrial processes. GE is now exploring how big impact are actively pursuing them as ave- 3-D printing can be used in additional busi- nues of innovation. nesses, including jet engine manufacturing.

Multipurpose Platforms Advances in technology plat- Technology-enabled innovation comes in many flavors. It can mean using advanced forms are the most import- analytics to improve decision-making, employing digital technologies to retool manu- ant factor driving innovation. facturing, and harnessing mobile capabilities to improve marketing, to name just a few. The crux in all cases is the creation of a plat- All kinds of companies, in industries from the form that can be leveraged repeatedly to de- most basic to the most advanced, are applying liver impact. In our experience, technology technology-enabled innovations with substan- platforms can bring benefits in at least four tial effect. For example, IBM has created a $7 areas: cost and timeline reduction, often billion business through its Smarter Planet though automation; business transformation; initiative, which puts technology advances to the enhancement of process; and, most sig- work in everything from installing smart grids nificant, business model innovation through for water conservation to using big-data ana-

The Boston Consulting Group | 15 Exhibit 8 | High Expectations for Technology Platforms and Big Data

WHICH OF THE FOLLOWING AREAS OF INNOVATION/PRODUCT DEVELOPMENT WILL HAVE THE MOST IMPACT ON YOUR INDUSTRY OVER THE NEXT THREE TO FIVE YEARS? % of respondents 60

50 49

40 36 35 34 33 32 31

26 26 26 25 23 20 18

0 Technology Operations Business Extension Marketing Speed Digital platforms process model of existing of adopting design products new technology New Customer Big-data New Mobile Extension Supporting products channel analytics service products/ of existing capabilities capabilities services

Source: BCG Global Innovation Survey, 2015.

lytics to improve urban services. A major ce- tween the business functions and IT, sound ment maker used a combination of digital, system architecture, a partnership attitude mobile, and geolocation technologies to devel- (both internally and with external resources), op a delivery model that reduced its fleet size and, more and more frequently, an agile style by 35%; it also enabled a step change in cus- of innovation development. tomer service by narrowing delivery windows by 90% and reducing missed deliveries by Adopting these practices is far from easy— 97%. Google and Facebook are experimenting companies encounter a host of organizational with drones and balloons to bring mobile In- and cultural hurdles—and it typically in- ternet access to rural and hard-to-reach areas volves a journey that is measured in years. in developing countries. The challenges can be daunting: breaking down organizational silos, shifting to an agile process, moving from a heavy IT architecture How to Get There to modular systems, and overcoming internal Companies that develop and innovate using resistance. technology platforms put several practices in place. They regard functions such as IT and One of the most difficult—and important— analytics as centers of value rather than of organizational and cultural shifts is moving service or cost. They tend to centralize inno- from a traditional “waterfall” approach to vation (44% of both strong and disruptive in- idea development, in which stopping a proj- novators use a centralized innovation model), ect is seen as tantamount to failure, to an ag- and they make sure to have staff 100% dedi- ile approach that sets as many ideas racing cated to innovation. They follow a structured as possible and quickly and happily kills off approach rooted in a clear strategic vision; the ones that fail to show potential. Compa- their organizations enable innovation; and nies that make this change also become good they are supported by specialist expertise. at taking in ideas from all kinds of sources, Their approach features tight alignment be- including internal idea labs, external scout-

16 | The Most Innovative Companies 2015 ing, thought leader monitoring, vendor rela- •• Foster a test and learn, fail fast and fail tionships, crowd sourcing, and academic cheap mentality. Encourage risk taking partnerships. by actively reporting on both successes and failures. Communicate explicit Companies that want to pursue more technol- approval of management’s willingness to ogy-enabled innovation can start by taking try and fail. the following steps, distilled from the best practices of global leaders: •• Encourage a collaborative approach between IT and business units. At •• Deliberately allocate budget and companies that are strong innovators, IT is resources to technology innovation. no longer in its own silo. Instead, technical Approaching the challenge as an extra or talent is integrated into business units and add-on responsibility will not work. innovation teams. Establishing a cross-functional, dedicated R&D lab is often a good way to start. Technology-driven innovation is hard. But the payoff is big—often extending well beyond a •• Put in place appropriate incentives for single new product to a platform or capability individuals to pursue innovation. that can enable other innovations for years to Organize innovation contests, provide come. rewards and recognition, and (where appropriate) include innovation in job objectives.

The Boston Consulting Group | 17 THE PREREQUISITES OF PROFITABLE ADJACENT GROWTH

djacent growth is a hallmark of There are five ways for companies to expand Ainnovation leaders. Recurring members into adjacencies: by exploring demand-centric of BCG’s annual list of the 50 most innovative growth, by cultivating a new organization with companies—3M, General Electric, and new talent, by employing separate gover- Procter & Gamble, for example—have long nance, by adopting an experimental approach, succeeded by developing new products in or by building the right cultural enablers. nearby markets that lead to incremental profitable growth. Younger, tech-based innovators such as Apple, Amazon, and Explore Demand-Centric Growth Google have aggressively followed a similar Even today, there are still companies that strategy. view their categories, and the segments within them, through either an industrial lens (group- They’ve done so for good reasons. As mar- ing by production technology) or a demo- kets mature and competition increases, graphic lens (such as Millennials compared growth in the core portfolio inevitably slows. with baby boomers). Historically, this ap- Introducing new products means going up proach was understandable because compa- against entrenched competition, and even nies often lacked the data to segment consum- companies that innovate successfully in exist- ers more precisely. But in the age of big data, ing markets often end up cannibalizing sales it has become much more feasible to think of their own brands. Adjacencies help inno- deeply about different types of consumers vative companies open new avenues for and their motivations. (See Enabling Big Data: growth through exposure to markets in Building the Capabilities That Really Matter, which they benefit from 100% of the share BCG Focus, May 2014.) that they achieve. World-class innovators are moving from in- Adjacent growth is sound strategy, but there’s dustry- or demographic-based segmentation a hitch: it’s difficult for most mature compa- to what we call “demand centric” segmenta- nies to pull off. Big companies are often vic- tion, which identifies the drivers of deci- tims of their own success; they operate ac- sion-making by looking at the intersection of cording to cultures and business systems that context (who the customer is, how he or she are set up to drive growth in the core. The thinks, and what he or she does) and emo- key success factors for developing profitable tional or functional needs. Using richer data new products in adjacent markets are often than was ever available before, companies different. can construct a “demand map” that clusters

18 | The Most Innovative Companies 2015 consumer choices in a particular category ally separate from other innovation teams. into common need bundles—or “demand There are several reasons. One is day-to-day spaces.” These spaces are usually expressed reality. If adjacent teams are not separate, in everyday language, such as “perfect for my they are almost inevitably pulled into core ef- family” or “the kind of break I need.” When forts, and their budgets often get repurposed clearly articulated, they provide the right tar- to address short-term challenges in the core gets for innovation by adjacency teams. business. Another reason is that adjacent innovation requires different people with different capabilities from those who drive core in- “Demand spaces” provide novation. Companies that try to use the same people in new roles find that the adjacent the right targets for innova- teams tend to drift back toward core ideas and to miss adjacent opportunities. Adjacent tion by adjacency teams. innovation also requires an “investor” as op- posed to an “operator” mind-set, which means populating teams with individuals This kind of thinking can also be applied to with different management outlooks, an en- drive growth in the core. For example, Hilton trepreneurial bent, and a longer-term focus. Hotels eschewed conventional market re- These sorts of individuals are more amenable search that groups people broadly by age, in- to risk-taking and more resilient in the event come, and occasion (such as “leisure versus of failure. business” or “long stay versus short stay”) in favor of asking people to describe what they want in a hotel and when and why they want Employ Separate Governance it. Based on the results, the company was Adjacent innovation generally requires a se- able to construct a map of what really mat- nior governance team that can play a role ters to consumers. It could separate the hospi- equivalent to that of a private equity or ven- tality market into multiple categories—de- ture capital investment committee. Its mem- mand spaces—such as “cool and hip” and bers need the breadth of vision, practical ex- “recharge and refresh,” and allocate each of perience, and organizational clout to review its brands to one or more of them. adjacent opportunities with an understanding of the risks involved, the ability to make The results were startling. Not only did the choices to narrow the funnel, and, ultimately, demand space analysis help separate and re- to allocate capital to the best ideas. This is duce cannibalization among Hilton’s nine quite a different set of capabilities than is brands; it also uncovered an opportunity to typically found in a core business’s gover- reposition the company’s flagship brand into nance body, which focuses first on execution the “recharge and refresh” space. This was a and may look askance at anything that is new high-growth area making up 25% of the mar- or different. The adjacency governance body ket—and it was therefore far more attractive also needs to play a defensive role—hence than the travel segment that Hilton had pre- the requirement for organizational clout— viously targeted. In only a few years, de- protecting new adjacent initiatives and their mand-centric growth at Hilton contributed to funding from attacks stemming from the a dramatic improvement in the value of the near-term urgency of the core. business. In 2013, Hilton’s private equity own- er took the company public at a 27% premi- um over the 2007 purchase price. It was the Adopt an Experimental Approach largest IPO ever for a hotel operator. Since adjacencies are often uncharted territo- ry and involve plenty of unknowns, failures are likely. What’s important is to employ a Cultivate a New Organization low-cost, fast-fail methodology that is based with New Talent on a test, learn, adapt, and move on ap- We consistently find that teams charged with proach. Those overseeing the teams need to adjacent innovation need to be organization- plan for the higher likelihood of initial failure

The Boston Consulting Group | 19 and design their approach accordingly, using moved from its initial innovative notion of these early forays as learning opportunities. selling books online to become the most disruptive force in retailing by selling just about everything online. Along the way it built a Build the Right Cultural Enablers global network of 80 fulfillment centers—so Culture can be a highly effective killer of new it started offering fulfillment services as an ideas. If adjacency projects get measured option for small merchants, which could against existing norms and expectations, the thereby distribute almost as efficiently as effort to move into new markets is doomed. Walmart. In parallel, it built enormous scale Companies need to put in place the necessary in its data centers and world-class skill in op- cultural enablers to support an adjacency in- erating them. It then reconceptualized this novation program. These include: computing infrastructure as a product in its own right. In 2006, the company opened Am- •• A long-term focus given longer develop- azon Web Services (AWS) as a standalone ment and incubation periods cloud computing service, renting out raw computing capacity that ultimately evolved •• A greater appetite for risk given inherent- into a complex stack of computing services. ly higher failure rates Today Amazon even sells the service to competitors such as Netflix. By the second quar- •• Recognition of the value of novel sources ter of 2015, AWS had become a $1.8 billion of growth (which risk little or no cannibal- business growing at more than 80% year over ization of existing revenues) compared year, with a profit margin of 21%. with projects evaluated on the basis of near-term profit It’s Not All or Nothing •• Avoiding the tendency (and it is strong) to Plenty of companies are better placed than migrate toward developing products, they think to explore adjacent innovation. As services, and business systems that look we have described in earlier chapters, strong exactly like those in the core innovators have considerable assets that they can draw on in areas such as speed, lean pro- •• Incentives to support all of the above cesses, and the application of technology, and these often provide starting points to explore adjacencies. In parallel, a company thinking Learning from the Masters about adjacent growth should also determine As we observed in last year’s report on the where its gaps are vis-à-vis the five areas out- world’s most innovative companies, some lined above and develop a plan to address breakthrough innovators manage to use the them. Once the internal house is in order, entire company as a new-idea laboratory. Ap- companies can begin to look around the ple under the late Steve Jobs is perhaps the neighborhood for attractive opportunities for best-known example. Google, with its policy incremental profitable growth. of encouraging employees to spend 20% of their time working on their own ideas, using the company’s tools and data, is another. 3M has long allowed its employees to spend up to 15% of their time on projects of their choosing, using the company’s resources.

Perhaps no company better exemplifies adjacent innovation than Amazon. The company

20 | The Most Innovative Companies 2015 APPENDIX

BCG’s rankings of the most innovative com- As noted in chapter 1, this year we made two panies are based on a survey of 1,500 senior changes to the methodology that rendered executives representing a wide variety of in- the results more robust and reflective of top dustries in every region. Before 2008, our innovators across all industries. We asked re- rankings were based on a single criterion— spondents to rank the most innovative com- respondents’ picks. In 2008, we added three panies both within and outside their own in- financial measures: three-year growth in total dustry, and we applied five-year growth in shareholder return, revenue, and margins. TSR to indicate performance over a longer (TSR includes stock price appreciation and time horizon. dividends.) Respondents’ votes counted for 80% of the ranking, TSR for 10%, and revenue and margin growth for 5% each.

The Boston Consulting Group | 21 NOTE TO THE READER

About the Authors Acknowledgments For Further Contact Michael Ringel is a senior partner The authors are grateful to Erin If you would like to discuss this re- and managing director in the Bos- Fackler, Eugene Foo, and Gail Stahl port, please contact one of the au- ton office of The Boston Consulting for their assistance with the re- thors. Group. Andrew Taylor is a senior search and preparation of this re- partner and managing director in port. They also thank Justin Manly Michael Ringel the firm’s Chicago office. Hadi for his help in developing the chap- Senior Partner and Managing Director Zablit is a senior partner and man- ter on adjacencies and Matthew BCG Boston aging director in BCG’s Paris office. Clark for directing the report’s +1 617 973 1200 preparation. Finally, they are grate- [email protected] ful to David Duffy for writing assistance and Katherine Andrews, Gary Andrew Taylor Callahan, Kim Friedman, Abby Gar- Senior Partner and Managing Director land, Gina Goldstein, and Sara BCG Chicago Strassenreiter for editing, design, +1 312 993 3300 and production. [email protected]

Hadi Zablit Senior Partner and Managing Director BCG Paris +33 1 40 17 10 10 [email protected]

For information or permission to reprint, please contact BCG at: E-mail: [email protected] Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

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