I N N OVATION LEADERS

Innovation leaders are those who are either able to better understand customer requirements and exploit new market opportunities, or access new technologies to deliver successful new products and services. They are seen as the corporate heroes of today. Innovation Leaders are the companies that CEOs want to head up and other organisations try to emulate. As companies in different sectors seek to make the most out of innovation, one question that is often asked is who are the real innovation leaders? Who are the companies that may not be shouting about it, but are actually delivering innovation and gaining direct impact to the top and bottom line? Based on extensive analysis of the performance of the top 1,000 companies across 20 sectors, Innovation Leaders profiles the organisations that are making the most impact today.

I N N OVATION LEADERS

I N N OVA R O. C O M I N N OVA R O. C O M I N D E X I N N OVATION LEADERS Adidas-Salomon RESEARCH: Innovaro Insight www.innovaro.com/insight.html

TEXT: Write On Communications www.writeoncommunications.co,uk BP DESIGN: Julie Clements [email protected] Canon PRINT: EMP Communications www.empcomm.co.uk DSM PR: BlueBear www.bluebear.co.uk H&M Published by Innovaro Limited Honeywell 84 Brook Street London W1K 5EH Logitech www.innovaro.com Medtronic [email protected] Microsoft Copyright © Innovaro 2005 Nokia Innovaro asserts the moral right to be identified as the author of this work A catalogue record for this book is available from The British Library Novo Nordisk PepsiCo ISBN 0-9549853-0-3 RBS All rights reserved. Permission should be sought from the copyright owner before any part of this publication is reproduced, stored in a retrieval system, or transmitted by any other Reckitt Benckiser means. Agreement will normally be given, provided that the source is acknowledged. Samsung Every effort has been made to ensure the accuracy of all information and data in this book. Tesco However, the copyright owner does not accept any responsibility for any loss or damage arising from the possession or use of this publication, whether in terms of correctness, Time Warner completeness or otherwise. The application, therefore, by the use of the contents of this publication or part thereof, is solely at the user’s own risk. Toyota

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Innovation is a topic now firmly on the corporate agenda. It is hard to miss that it is increasingly seen as a good thing. It seems as if everyone is now promising to “deliver innovation.” From FTSE 100 companies and EU Framework programmes to the World Bank and the UN, innovation is being embraced as a source of improved performance, sustained growth and long-term benefit. Everyone wants a piece of it. Certainly it has an attractive message, although quite what it actually means to different organisations, disciplines and even individuals varies widely. From improved market share and greater return on investment to more product launches and increased intellectual capital, innovation per se is being ever more linked to positive outcomes.

Innovation leaders, those who are either able to better understand customer requirements and exploit new market opportunities or access new technologies and develop successful new products and services, are seen as the corporate heroes of today. Innovation Leaders are the companies that CEOs want to head up and other organisations try to emulate.

As companies in different sectors seek to make the most out of innovation, one question that is often asked is who are the real innovation leaders? Who are the companies that may not be shouting about innovation in adverts but are actually delivering it and gaining direct impact to the top and bottom line? Although there are various ways of measuring innovation project success or contribution, many dependent on the type and level of innovation activity being pursued, reliable guidelines on exactly which organisations are the most effective innovators at a corporate level are few and far between.

For the past seven years we have been tracking the innovation performance of the world’s leading companies and sharing our research with different parties. Over that time there have been some interesting insights, not only in which companies are able to sustain or regain their leadership positions, but also on what impact innovation leadership has on financial performance. Although timescales for impact differ from one sector to another, in each sector the shares of the top innovators significantly outperform those at the bottom. Taken as a cross-sector portfolio of companies, over the past three years the average share price of the identified innovation leaders has consistently outperformed all key international indexes including NASDAQ, Dow, FTSE and DAX.

Innovation Leaders provides a collection of the innovation profiles of the organisations that are having the most impact at the moment. We hope that you find these interesting and maybe of relevance to your future response to the innovation challenge. These Innovation Leaders are the heroes of today but who will be those of tomorrow? S P O RT S G O O D S P R O F I L E : A D I DA S - S A LO M O N

Through a combination of technological innovation, high-profile sponsorships and street credibility, Adidas- Salomon has closed the gap on its market rivals. Over the past 80 years, it has built up a collection of sports footwear, clothing and accessories businesses that today collectively account for around 15% of the world sporting goods market. The company’s key brands such as adidas Sport Performance, adidas Sport Style, Salomon, Taylormade and adidas Golf combine performance and fashion in sports ranging from climbing and in- Adidas-Salomon’s Chairman and CEO, Herbert Hainer, has set In 2004 Adidas-Salomon introduced several major new the company a target of launching at least one major new technologies including Roteiro, a thermally bonded football line skating to soccer and golf. In the last few years, Adidas-Salomon has doubled its share of the footwear technology or technological innovation every year between used at Euro 2004, and the T-MAC 4 lace-less technology - a market, by matching the introduction of new products with high profile sponsorship deals. Associations with 2005 and 2008. To achieve both the company goal and the first in the basketball shoe market. In the winter sport market David Beckham on the pitch and Ian Thorpe in the pool have paid dividends and sponsorship of major sporting wider aim of supporting athletic peak performance, the new innovations such as the Scrambler and Streetracer ski events such as the 2000 summer Olympics have kept the company in the eye of the consumer. In the run up to organisation is committed to keeping the product pipeline full collections and the ERA snowboard technology were also Euro 2004, over 1 million pairs of the PredatorPulse boot, as worn by Ballack, Beckham and Zidane, were sold. and is striving to bring about innovation in technology and launched. The 2004 Olympics tally for Adidas-sponsored design. Adidas-Salomon has been quick to recognise the athletes was an impressive 101 gold, 73 silver and 99 bronze importance of fashion and its launch of the first sports medals. In 2005, launches include the first shoe with “intelligent” performance designer collection for women in partnership with cushioning and a men’s designer collection. Although Nike still Stella McCartney appears to have been done without diluting its has the largest share of the market, Adidas is using its sporting credentials. innovation-driven line-up to move forward.

Innovation Scorecard Adidas-Salomon Key 2004 Data

Innovation Culture 8 Total Revenue ¤6.267bn Strategic Innovation Focus 9 Revenue Growth 3.4% New Products 9 Profit ¤562m Managed Growth 6 Profit Margin 8.9% Product Margin 7 Gross Margin 44.9% Investment in Innovation 8 US Patents 48 Innovation Brand Impact 9 Employees 15,686 Innovation Peer Review 8 Revenue / Employee ¤400k S P O RT S G O O D S

ONES TO WATCH: I N N OVATION DRIVERS • Nike, the sector leader, has launched a number of new innovations including The sports product industry is all about innovation – in Nike Free, a technology designed to mimic the natural motion of the bare t e c h n o l o g y, product design, functionality, graphics and foot to provide added strength presentation. Without innovation sporting goods companies are • Speedo, whose Team Speedo had 18 very vulnerable. As Kim Blair, Director of the MIT Centre for gold, 18 silver and 14 bronze medals Sports Innovation, puts it: “If sporting goods manufacturers want in the 2004 Athens Games and is investing heavily in further developing to stay on the cutting edge, they need to introduce new its Fastskin performance team products on a regular basis, ideally every six months”. And if that launch coincides with a major sporting event so much the better. Key brands such as Nike, Reebok, Speedo and adidas all release new products in the build-up to events such as the SECTOR OV E R V I E W Olympics and the SuperBowl and increasingly build wider engagement programmes around them. Nike’s Scorpion The difference between gold and silver in athletics can be as In terms of global sales, sportswear takes the biggest share competition had over a million children worldwide playing little as one hundredth of a second. The winning margin in with sports tops and footwear the individual bestsellers. In three-a-side games to coincide with the 2002 World Cup. Not the sporting goods market is every bit as competitive. As the case of sports equipment, the biggest volume in 2004 s u r p r i s i n g l y, plans for 2006 are even more ambitious. well as the role of innovation and technology in sportswear, was in personal exercise machines for the ever expanding Traditionally, a core driver for innovation in sports equipment which Nike claims gives its athletes a 1.13% improvement portfolio of public and private gyms, followed by golf has been staying one step ahead of the competition through in track times, sporting goods companies’ success depends equipment, hunting gear and fishing tackle. Some trends in appearing faster, stronger, longer and higher. The psychological on two other key factors: the credibility and integrity of the sports are changing as Generation Y heads outdoors. Action effect of dynamic, cushioned track shoes or drag-reducing sportspeople endorsing their products and the popularity of sports such as snowboarding, extreme biking and in-line textiles on running and swimming suits can’t be overlooked. the sports they sponsor. Not withstanding long-term factors skating are gradually catching up with traditional games such Nor can the influence of fashion. Puma, a relatively small player such as changing sport trends and the support that as soccer and basketball. The global sports market has been in the footwear market, gained significant growth and governments and sports associations give as part of increasing steadily throughout the last half century and is profitability when its products were worn by celebrities such as developing a fitter nation. UEFA and FIFA are, for example, now worth over $2.5 trillion. Thanks to greater promotion, Madonna. The industry is now looking outside its normal patch both actively supporting a number of initiatives to get more the desire for a healthier lifestyle and rising participation in to smart technology innovations such as wearable electronics young people playing football. Asia, this growth is expected to continue at 5% over the and power-measuring devices. next decade. E N E R GY

P R O F I L E : B P The company has also invested heavily in developing its economy in the pipeline and three times the patent activity of its renewable energy portfolio and is now the world’s largest nearest rival, BP’s aim is to apply technology faster and more In a sector being transformed by the implications of manufacturer of solar technology and one of the prime efficiently than the competition. The company plans to maintain climate change, BP demonstrates how the ability to generators of solar energy. Other key technological innovations its growth and improve gross margins and cash flows while grow and diversify keeps it on top of the game. Not have included using seismic imaging to find new deep water oil simultaneously preparing multiple options for the future. In a only is it one of the largest companies in the world by fields in the Gulf of Mexico and setting up systems to provide the changing world, BP is focused on building its presence both market capitalisation and size, it is also one of the most co m p a n y ’s traders with the latest insights to enable them to within and outside of the core oil and gas arenas. profitable. Formed in 1909 as Anglo-P ersian Oil, BP make rapid decisions. New technologies have also reduced both the manufacturing costs and environmental impact of its Innovation Scorecard has moved its centre of gravity from the Middle East to chemicals business and accelerated construction of its major the USA and Britain. BP today is an international LNG plant in Tri n i d a d . Innovation Culture 7 company with operations in over 70 countries. Strategic Innovation Focus 8 Following full privatisation in 1987, and despite a major In 2004, BP generated profits of $16.2bn, up 26% year on year. New Products 7 Production in its upstream division rose by over 10% and the loss in 1992, BP has not only reinvented itself, but also Managed Growth 9 c o m p a n y’s reserve replacement ratio rose for a twelfth become a leading cross-sector example of managed Product Margin 9 consecutive year. Return on average capital employed, a key growth thanks to its successful mergers with Amoco, Investment in Innovation 8 measure of business efficiency, increased from 17.8% to 19.6%. Innovation Brand Impact 8 Aral and Arco and a joint venture with TNK in Russia – With the introduction of new products there were higher Innovation Peer Review 9 all of which have enhanced and balanced the margins in both refining and marketing, with profits more than co m p a n y ’s oil and gas exposure. Without its particular doubling and retail sales reaching $6bn for the first time. In BP Key 2004 Data organisational culture and structure, BP couldn’t have addition, its solar division, introduced new developments such as achieved this. One of the leanest companies in the Saturn, which has set new records for solar cell efficiency and is Total Revenue $294.849bn investing in new thin-cell solar technology which will further FTSE, BP is constantly pruning itself to maintain focus Profit $16.2bn drive down costs. But BP also has a conscience. Of all the energy on profitable growth. The performance contracts that Profit Increase 26.1% majors, BP is the most vocal about climate change and was the have been put in place to both free and challenge first to set targets to reduce emissions. It achieved its 2010 target Reserve Replacement Ratio 110% business units, strategic performance units and of a 10% reduction in greenhouse gas emissions nine years early Production 3.997 bboe individuals, have become a core component in the in 2001 and in 2004 set new stabilisation targets and scaled up Average refining margin $6.08/bbl co m p a n y ’s decentralised approach to new product and its innovative internal emissions trading system. With more new Return on Average Capital 19.6% Revenue / Employee $2.726m service delivery. products focused on providing high performance and fuel E N E R GY

ONES TO WATCH:

• Exxon Mobil which continues to I N N OVATION DRIVERS maintain very high profitability with a record-breaking $25bn profit on a turnover of $298bn in 2004, up 17%, Given the key challenges from rising energy demand in the US and now has 20% return on capital and China coupled with depleting major oil reserves in high-risk • Texaco which, after successful recent areas of the world, new oil and gas reserve discovery is a major acquisitions of Elf and Fina is now capability that supports future growth. However, in the absence number four by size and has one of the highest forecast reserve of any significant new finds, creating new technological solutions replacement ratios in the sector to extract more from existing fields and access the less conveniently located reserves is a major area of innovation. Another is in creating the differentiated products that will encourage brand loyalty from the key motorist target consumer. Outside oil and gas, there is also a growing focus on clean solutions to coal extraction and supply. In the increasingly SECTOR OV E R V I E W popular renewable energy arena, the major arena for innovation activity is in creating economic solutions that can The energy sector is entering a period of major transition. outside the US and, as the impact of climate change meet the mass market demand and supply needs. Lastly, as one Oil reserves are being steadily depleted and, as the industry becomes more evident and the ambition of the hydrogen of the long-term sources of pollution, across the sector there is nears peak production within the next decade, supply is economy more credible, energy companies are increasingly an imperative to be more innovative in the ways and levels to becoming a key issue. Today 63% of proven oil reserves are keen to display their green credentials. That said, the basics which it reduces its greenhouse gas emissions. in the Middle East and the largest market, the US, shows no of the business are still largely dominated by the up-stream signs of slowing demand for this key commodity. An activities of fossil fuel exploration and production and the increasing gas supply from Russia and the Middle East is down-stream activities of refining, distribution and currently meeting the rising demand from Europe and China marketing. Yes, there are new players in the sector – and there is also an increasing demand for coal. Nuclear and including technology-based start-ups in the wind, wave and hydroelectric production is currently flat, but the pressure solar renewable energy space and the ex-state oil and gas to migrate to clean or renewable energy sources is companies – but the real power still resides with the mounting. The Kyoto protocol is gradually influencing policy ‘majors’ that have come to dominate the sector. OFFICE EQUIPMENT P R O F I L E : C A N O N

Canon’s products are loved and trusted by both professional and amateur photographers around the world. Canon’s growth and ambition is supported by pioneering product builds on earlier success in the graphics industry and Inspiring less passion but equal trust are the copying machines and laser printers of which Canon is the number technology across its four core-competency areas of precision combines popular features with a Multifunctional Embedded one global supplier. The continuous introduction of highly competitive products has helped Canon build and mechanics, fine optics, microelectronics and electronic imaging. Application Platform to meet a wide range of professional print The concept of “Canon over IP” guides the company’s R&D workflow needs. Canon also made significant investments in maintain its profile as an innovation leader. In office equipment, Canon’s strategy is to maintain this position programmes. This means network-capable products are now optical technology, nanostructural materials and mesoporous through the introduction of advanced features on its colour laser printers at a lower price, all with a growing all supported by connectable applications and services. New materials in 2004 that will support further new product emphasis on emerging markets. New document storage and retrieval solutions are part of Canon’s expanding products incorporating proprietary technologies have been innovations. service businesses which are bringing the much-vaunted “paperless office” closer to reality. With new C a n o n’s vehicle to establish global standards in network opportunities being developed in the print-on-demand area Canon is not content to rest on its laurels. Its imaging. Nearly 8% of the company’s sales are ploughed back expertise in optical and image-processing technologies leave it ideally placed to grab its share of the digital camera into new technology research, which is undertaken by a global Innovation Scorecard market, alongside photo printers offering ever better image quality and faster print speeds. Meanwhile, in the R&D network spread over seven locations worldwide with fundamental new technology research taking place in Japan. The Innovation Culture 8 area of semiconductor production equipment, Canon continues to market aligners for large LCD panels while core technologies developed in these locations reflect the Strategic Innovation Focus 8 investigating the potential for similar products for smaller panels. Put all of this together and you find that in 2004, strengths of each country or region and researchers are New Products 8 Canon’s net sales grew by 8.4% and are projected to grow by 4.7% in 2005. encouraged to exchange and share ideas as part of Canon’s Managed Growth 7 globalisation. The company is also redefining the journey from Product Margin 8 concept to finished product – “Prototype-less design” is greatly Investment in Innovation 9 reducing development time, allowing Canon to respond quickly Innovation Brand Impact 8 in the fast-changing consumer electronics and office equipment Innovation Peer Review 8 markets alike and yet maintain its high production standards.

In 2004 Canon entered a pan-European agreement with Kodak Cannon Key 2004 Data Polychrome. The agreement opens new sales channels, giving Total Revenue $33.34bn Canon a wider reach across Europe and enabling the company Net Income $3.3bn to offer a bespoke approach to new and existing customers. Profit Margin 9.9% 2004 also saw the introduction of new proofing solution. This R&D Investment $2.64bn was in response to the industry demand for a colour management suite and workflow consultancy to bridge the gap R&D Intensity 7.9% between creative agencies and professional printers, so easing US Patents Granted 1855 production approval processes. A third coup was the launch of Revenue / Employee $308k a new compact multi-functional colour printer. This new R&D Spend / Patent $1.42m OFFICE EQUIPMENT

SECTOR OV E R V I E W

The office equipment sector is evolving rapidly and sits at digital devices, developed specifically for intranet / internet I N N OVATION DRIVERS the intersection between consumer and business electronics office environments. These markets are also seeing an and the IT industry. The sector is populated by such increased demand for high-resolution colour printing. The The strongest innovation driver in this sector has been and will companies as Konica Minolta, Océ, Brother and Canon. trend towards home working and the mobile office means continue to be digitisation. The example of the network printer With the market in developed countries very near saturation there is a renewed emphasis on the need for portable, that can efficiently and effectively operate as a scanner, copier, many companies are turning to the recently expanded lightweight peripherals as personal computers become fax machine and can even be used for e-mailing is emblematic. European Union. The eight countries in central and eastern smaller and converge with the PDA. Finally, another, less Originally print control attachments were developed to allow Europe are particularly important markets for monochrome talked about influence on the office environment is the copiers to become multifunctional, now printers can be / colour printers and copiers as well as multifunctional strengthening and implementation of country- s p e c i f i c converted to provide PCs with all the required functionality. peripherals. Meanwhile the more mature markets are seeing disability acts that are targeting reduced employment Inkjet printers are being further eclipsed by the demand for demand stimulated by the advent of high-end multifunctional discrimination against those with disabilities. better quality and faster colour print with laser printing now costing significantly less than on the average inkjet printer. All of the recent developments have created a need for advanced management software for office automation equipment alongside the ability to remotely administer the equipment and where necessary effect repair and modifications. Another driver ONES TO WATCH: has been the need to extend the paperless office through

• Fuji Xerox, a leading provider document storage and retrieval solutions at the low-end of the of quality print solutions, market, specifically targeting the small office and home working recently unveiled several new with appropriately sized equipment. products including its first en t r y -level colour printer, giving high quality technology at an affordable price • Konica Minolta, a joint venture formed in August 2003 to enhance the combined competitive business capabilities and earning capacities, is already aggressive in the market C H E M I C A L S

P R O F I L E : D S M Innovation is nowadays central to DSM’s culture. The company DSM continues to dominate the supply of polyethylene fibre and claims an unlimited passion to innovate and an equal has recently announced a further expansion of production in the commitment to developing ever better products and services. US in support of demand for high strength fibers. To strengthen Innovation, collaboration and sustainability are just DSM is living up to these aspirations through its attention to detail its resin and coatings business, the company has also recently three of the attributes which are making DSM a key and the platforms it has developed in health and nutrition as a acquired NeoResins, a technology leader in specialty water- player in the future of the chemicals industry. In the response to the growing trend for healthy diets. As a result of the based acrylic and polyurethane resins for use in paints, coatings, co m p a n y ’s bid to reinvent the sector, it showed solid scarcity and increase in costs of oil-based feedstock, the adhesives and inks. In 2004, a deal was signed with the German company has increased investment in alternative sources. DSM co m p a n y , Haleko, the number one sport-nutrition company in growth in 2004, with no sign of slowing in 2005. DSM has created a cross-organisation focus for innovation through its Europe, to manufacture Peptopro, a specialist sports recovery evolved from the Dutch nationalized coal company adoption of an open innovation model which was launched in drink. This product was developed in conjunction with the formed in 1902. Based on the production of ammonia 2003. At all stages of this approach, DSM is showing greater Dutch Olympic association and is being launched by the Dutch and ingredients for nitrogenous fertilizer, a strong awareness of what’s going on in the outside world and is keen to eight times Olympic medalist swimmer Inge de Bruijn. In keeping chemical heritage emerged as a diversification from the learn from the experiences of others – be they consumers, with its growth strategy, DSM has recently announced an co m p a n y ’s coal processing operation. Diversification customers, competitors or suppliers. As part of the open expansion of its polyamide capacity by over 33% and production and innovation became the bywords of the business innovation culture, the organisation encourages wide-ranging is expected to come on-line shortly. For 2005, DSM is and in 1985 the company developed the polyethylene collaboration with other companies as well as with a number of continuing to grow all of its businesses with the goal of external research institutes. Attention is also being paid to maintaining and, in some cases, achieving sector leadership. fibre, Dyneema. In 1989, DSM was privatised. Since s u s t a i n a b i l i t y, particularly in the process used to transfer then, the company has grown from its modest origins knowledge around the business. to one of the world’s leading life science products, performance materials and industrial chemicals Innovation Scorecard DSM Key 2004 Data suppliers. DSM is now global, operating on every continent with over 200 plants. As a chemical Innovation Culture 8 Total Revenue ¤7.752bn intermediates company, the company supplies a wide Strategic Innovation Focus 9 Operating Profit ¤489m range of specialist, high performance pharmaceutical New Products 7 Revenue Growth 28% intermediates for medical applications, nutritional Managed Growth 8 Profit Growth 66% ingredients such as vitamins to the human and animal Product Margin 7 R&D Intensity 3.7% food industries, as well as new materials for inclusion in Investment in Innovation 8 Employees 24180 Innovation Brand Impact 8 Revenue / Employee ¤320k sporting goods and other high-performance uses. Innovation Peer Review 7 R&D Spend / Patent ¤4.33m C H E M I C A L S

SECTOR OV E R V I E W

The chemical industry has shown phenomenal growth for Instrumental in the changing structure of the global chemical more than 50 years, most of which has been in the industry has been the growing participation of developing manufacture of synthetic organic polymers used as plastics, countries and regions such as the Middle East, South East I N N OVATION DRIVERS fibres and elastomers – synthetic polymers form 80% of the Asia, Nigeria, Thailand and Venezuela. The chemical chemical industry’s global output. In 2003 the sector was industry is already one of the most international of all The past five years has seen the introduction of the highest calculated to be a $1.2 trillion global enterprise, largely manufacturing industries but increased globalisation is still number of environmental regulations in the chemical industry’s concentrated in three areas of the world: Western Europe, high on the agenda. The driving factor for this trend is the history. These regulations have been across all areas of the North America and Japan, commonly referred to in the need for improved profitability by reducing production costs sector and have been increasingly driving the development of industry as the Triad and where the EU remains the largest and an increasing demand for supply to be in closer new technologies. One example of this is the measures producer area. However, the traditional dominance of proximity to markets. Companies choose location for a introduced to curb the environmentally detrimental effects of its chemical production in the Triad countries through such specific operation based on the levels of trade between products. Another of the key innovation drivers is the rising cost companies as Dow, Du Pont, BASF and Bayer is being adjacent countries and high competition for market share. of the predominant crude oil feedstock which has led the increasingly challenged by changes in feedstock availability L a s t l y, increasing production costs have led to the industry to invest much of its innovation and R&D money in and price, rises in labour and utility costs, differential rates of consolidation and merger of multinational companies alternative raw material sources such as gas. This is evident in economic growth and environmental pressures. seeking economies of scale and portfolio rationalisation. Chevron’s and Sasol’s investment in a gas-based petrochemical plant in Nigeria, Shell’s recent acquisition of gas fields in New Zealand and Sasol exploring gas fields in Mozambique. Chemical companies supplying the food and pharmaceutical ONES TO WATCH: sectors have been motivated by the global trends in health and fitness and many have risen to this challenge. In order to take • BA S F , an industry giant, whose R&D activities are the environmental and health drivers into account in setting a now targeting promising new agenda for innovation, some of the key players have market trends in the areas of nanocubes, new sandwich adopted the so-called open system of innovation, where construction materials and environmentally friendly processes compete with existing new pigment preparations approaches based on environmental impact linked to emissions • Rohm and Haas is currently trading. One recently highlighted barrier to continued achieving double digit growth with a series of new global innovation causing considerable concern in the industry is the products coming out of its slowing supply of new chemistry graduates leaving European well established portfolio and US universities. management processes FASHION RETA I L P R O F I L E : H & M

In the increasingly competitive fashion retail market, a combination of fashion know-how, unbeatable price and The company’s ethos is about providing fashion and quality at The company proactively uses its Corporate Social organisational efficiency has propelled H&M to the top of the pile. From humble beginnings in the small Swedish an unbeatable price. Sales have grown constantly – in the last Responsibility initiatives and cooperates with Unicef and the town of Västerås, Hennes & Mauritz has grown into an international fashion retailer with stores in more than 20 five years turnover has nearly doubled to over 53 billion UN. It is also quick to recognise a mistake. Its initial US Swedish Krona, its operating profits are growing and ROCE is expansion strategy was rapidly rethought with the result that the countries, and plans for another 150 in 2005. Its product range now encompasses make-up and accessories as improving – H&M runs a tight ship and its expansion strategy is company’s share of the US market is now booming as it finally well as ready-to-wear fashions, its reach has grown from its Scandinavian base across Europe and North America, managed efficiently and carefully, typically building in regions moves to the former Gap heartland of the West Coast. and its Scandinavian customers can now shop on-line. where there is already a base. H&M plans to expand further into the States and Eastern H&M combines fashion savvy with effective, economic Europe while maintaining a focus on profitability. As it grows its production to provide a range that pleases both those in search business internationally, the company is clearly tracking the of good basics to those wanting the latest hot-off-the-catwalk higher end players’ strategies for expansion into the middle look. Its advertising is striking – mixing the right models, great market – a predominantly US-led arena where CK and H by clothes and a lower-than-low price tag – and is designed to Tommy Hilfiger are attracting more attention. Lastly, H&M’s create a clear brand image across all markets. The company has 2004 collaboration with Karl Lagerfield has been both a critical streamlined its production to include 700 suppliers across three and commercial success with customers queuing over night just continents, but the chosen supplier is not always the fastest; as to buy one of the designs. This mix of cool, organised efficiency the drivers for success for each piece of clothing differ. H&M and hot fashion know-how will ensure that the press and its knows its customers and it knows the mix of clothing that sells. customers continue to praise its progress and keep the Its turnover is fast and its stock is changed on a daily basis. tills ringing.

Innovation Scorecard H&M Key Data

Innovation Culture 8 Total Revenue SEK53.695bn Strategic Innovation Focus 8 Revenue Growth 11.3% New Products 8 Operating Profit SEK11.005bn Managed Growth 9 Profit Growth 14.5% Product Margin 9 Operating Margin 19.9% Investment in Innovation 7 Total Number of Stores 1,068 Innovation Brand Impact 8 Average Revenue per Store SEK58.28m Innovation Peer Review 9 Revenue / Employee SEK1.694m FASHION RETA I L

ONES TO WATCH:

• Ba u g u r , the Icelandic company led by the dynamic Jón Ásgeir Jóhannesson,is I N N OVATION DRIVERS rapidly expanding its impact and reach in fashion retail through its Whistles, Karen Millen and Oasis brands The best high street fashion retailers have broken fashion’s glass • George is now stocked at 250 Asda ceiling by focusing on the season’s must-have items from the stores in the UK in addition to four catwalk – these appear quickly on the rails faster and cheaper bespoke high street outlets, and is than they will later be retailing at in the high end stores. As expanding globally into new markets such as Mexico and the US on the canny consumers mix and match to create the latest look, those back of the Wal-Mart network retailers most adept at reading the market and their customers can keep increasing both market share and profit margins. Visual merchandising and advertising play a part in enhancing fashion credibility with the best retailers visible in the glossies, on bus stops, in catalogues and on the internet. By creating demand for SECTOR OV E R V I E W clothes that look like they’ve come straight off the catwalk, but without the price tag, the high street is pulling in customers with Fashion retail is an increasingly tough market – only the Fashion is focused around three capitals: Milan, Paris and significant spending power and spend per customer is growing. fittest will survive and efficiency must be demonstrated from New York. Whilst London provides direction and a much In the UK, where Top Shop leads the others follow and the design concept to after-sales service. Fashion is no longer touted cutting-edge quirkiness, its importance on actual creation of designer diffusion lines and mini-collections has the province of the few, but a familiar part of the urban sales has diminished and many of its key designers now show created a buzz in the press and pulled in the punters. But the landscape with identikit stores across the globe. Whilst the in New York, where the power of the American buyers and heart of high street success is efficient management – both Zara drivers for Marc Jacobs’ and LMVH’s success differ from of American Vogue is indisputable. High end and high street and H&M have streamlined the production cycle with enviably those of Top Shop and Gap, high end designers ignore the fashion are becoming increasingly intertwined – the true efficient production and logistics management supported by lessons from the high street at their peril. This month’s fashionista mixes a thousand pound handbag with a Topshop feedback and communications mechanisms with the stores that “must have” can swiftly become next month’s “has been”. skirt and delights in the difference in price. To pull in the allow for the right product, in the right quantity to be sold at the The mass market is dominated by the likes of Gap, H&M, customers, the savvy high street retailer needs to get the right place for the right price: A killer combination. Zara, JC Penny and Limited together with several key “own key trends from the catwalk to the store before the next labels” being nurtured within the larger general retailers issue of Vogue has arrived on the shelves. such as Wal-Mart and Tesco. A E R O S PAC E

P R O F I L E : H O N E Y W E L L Honeywell uses innovation as a core means of securing long- engaging with the after-sales support business. Honeywell will term relationships with its key customers and to strengthen its gain access to IBM’s engineering expertise, technologies, position as one of the world's leading technology- b a s e d research and development, and manufacturing processes and Honeywell operates at the cutting edge of today’s enterprises. Customer-centric innovation that integrates new facilities. For IBM there is access to Honeywell’s military and platform development, customer and end operator aerospace resources and expertise as well as the latter’s avionics technological innovation, but can trace its roots back requirements is at the heart of these relationships. For its military client list. Such evolving partnerships, strong technology to 1885. Having acquired Allied Signal, the company customers, including the new Joint Strike Fighter program and platforms and its positioning in the US market leave Honeywell now has interests ranging from control systems, the joint venture with Lockheed to supply the US Army’s future looking well placed for further innovation-led growth. transport and materials through to aerospace. combat system, many of the components use cutting-edge Honeywell is a leading global provider of integrated technology incorporated into new bespoke systems. Honeywell Innovation Scorecard avionics, engines, systems and service solutions for aspires to both supply vital ingredients for a wide range of Innovation Culture 6 aircraft manufacturers, airlines, business and general applications and also provide the long-term service support. Strategic Innovation Focus 8 aviation, military, space and airport operations. Based In February 2004, Honeywell projected deliveries of New Products 7 in Phoenix, Arizona, with annual sales of around $10bn approximately 2,400 new, civil-use helicopters during the period Managed Growth 7 in its own right, Honeywell's aerospace business 2005–2009. This projection was informed, in part, by increased Product Margin 7 demand for light single and intermediate twin-engine craft focuses on answering the call from its customers for Investment in Innovation 8 offering newer technology. Honeywell engineer, Don Bateman, safer, more reliable and more cost-effective flight. The Innovation Brand Impact 8 the inventor of the Enhanced Ground Proximity Warning System organisation has recently redefined many of its Innovation Peer Review 7 was recently named as one of 13 people to be inducted into the customer-supplier relationships across a broad array National Inventors Hall of Fame in 2005. Bateman’s system is of channels in the aerospace industry in a bid to create now mandatory in the United States for turbine aircraft with Honeywell Key 2004 Data wider and deeper partnerships with a number of more than six passenger seats. Accident rates since its Total Revenue $25.7bn leading military and commercial customers. Under its introduction have declined dramatically and similar laws are now Profit $3bn current leadership, Honeywell is focused on five key in effect in most of the world. At the 2004 Farnborough Airshow, Profit Margin 11.6% initiatives. Some of these initiatives are aimed at Honeywell showed products ranging from navigation and display technology to aerospace electronic systems and in November Aerospace Revenue $9.8bn further improving efficiency, productivity and cash Honeywell and IBM announced a 10-year engineering and Net Cash Inflow $1.6bn flow while others are centred on growth and technology services agreement that covers electronics for US Patents 563 development of personnel. aircraft, munitions and space and surface vehicles. The Revenue / Employee $239k agreement signals the seriousness with which Honeywell is R&D Spend / Patent $1.5m A E R O S PAC E

ONES TO WATCH: I N N OVATION DRIVERS

• Rolls-Royce has changed its business model to one of providing after-sales The aerospace industry is the second most technology- Atlantic partnerships have seen Raytheon forming new care of its fleet of civil and military intensive industry in the world and as such striving for technical European alliances and, in turn, BAE has been courting several engines – currently it has service excellence in fulfilling customer requirements is one of the key US partners in a bid to secure a greater share of Pentagon contracts for over 50% of its civil fleet • EADS, the European joint venture, innovation drivers. However, cost-cutting in both the civil and contracts. UK-based Smiths Industries has successfully which has the largest commercial military markets, leaves little or no profit from original penetrated the US market and the Lockheed / Augusta order-book from its Airbus business equipment and parts sales. This has led to the prospect of Westland joint venture has paid dividends in the shape of a is also benefiting from sales of the Eurocopter and the Ariane changing the business model to focus innovation on aftermarket Pentagon contract for a fleet of 23 presidential helicopters. commercial launcher and long-term service contracts. There are two other drivers of Technology-based innovation is clearly important here, but the major innovation in this sector – NASA and the Pentagon. For significance of political innovation should not be underestimated. companies like Boeing which bridge both the space program and the traditional civil and military businesses, there is a continued migration of the latest space materials and software SECTOR OV E R V I E W systems into the commercial mainstream while the Pentagon’s influence on new development has never been greater. As the The aerospace industry is seeing a welcome recovery. The which is good news, but these projections still fall short of human element is removed from the battlefield, automation, civil aviation market is emerging from a three-year recession the numbers for 2001. Military sales are growing in line with remote monitoring, greater precision and improved reliability with deliveries of Boeing and Airbus large commercial global military budgets which are scheduled to show a slight are all issues that are high on the wish-list for many would-be aircraft expected to be significantly higher in 2005 than last increase in 2005. Across both markets, a large number of equipment suppliers. Current technology innovation activity is year. Boeing and Airbus reported actual deliveries for 2004 high-technology component suppliers supporting a much thus centred on areas such virtual engineering, simulation and of 605 aircraft and combined deliveries for 2005 are smaller number of aircraft manufacturers in close strategic modelling, robust intelligent systems, integrated modular expected to increase by 11%. Welcome though the relationships is one primary characteristic of the sector. avionics, high performance stealth vehicles and advanced smart recovery is it remains fragile and as yet is not translating to There has been significant consolidation of the component materials appearing alongside more environmental propulsion increased profits for the majority of companies in the sector. and system supply base recently and, just as in the systems, safer airframes and more reliable automated guidance Regional and business aircraft production is expected to stay automotive sector, further rationalisation and alliance systems. All of this is occurring within the context of wider at the same level in 2005 as 2004 – in this case increased development is expected. Innovation as much as price is globalisation and greater national and corporate co-operation at business aircraft production making up for a drop in regional becoming a key differentiator as the convergence of the civil technical and commercial levels. The EU has been pivotal in aircraft deliveries. Overall passenger capacity in the global and military markets continues with common final product bringing together several previously competing companies into airline system is expected to grow by around 5% in 2005 and component suppliers vying for their shares. the EADS consortium that manufactures the Airbus. Cross- IT HARDWARE P R O F I L E : LO G I T E C H

Logitech’s twenty-year history has seen it develop on the back of the PC industry explosion to become a retail Logitech has placed design-led innovation at the core of the the remote control market for the digital home. The company brand recognised around the globe. The company was founded in 1982 and has grown steadily ever since. company. User-centred design is at the heart of the company’s is now also working in partnership with organisations like MSN Logitech designs, manufactures and markets human interface devices connecting people and computers. Early in innovation strategy. Indeed, this has become part of the culture to broaden the user base of video instant messaging. Logitech the company’s history it moved its operational headquarters from Switzerland to California and the relocation of an organisation whose ambition is to “make the digital world certainly does not rest on its laurels as it aims to triple its size coincided with Logitech’s establishment as the major supplier of Original Equipment Manufacturer (OEM) mice more personal and intuitive”. The development of the high-end over the next few years and, as well as building new to most of the leading PC manufacturers. Within a few years Logitech started to retail under its own brand and Logitech-branded products like the MouseMan range typify the manufacturing facilities in China, is also increasing its investment had become a global operation with manufacturing facilities in Taiwan, China and Ireland and marketing activities way that Logitech has tackled ergonomics to introduce an in product development to fuel further organic growth. evolving range of more comfortable mice. The company was run from Switzerland, Taiwan and California. Although small in scale, the company gained leadership of its chosen the first to introduce colour and later texture into a landscape Innovation Scorecard market area and by 1994 was investing 7% of turnover into new product development and launching around 25 of grey plastic and pioneered the optical technology that has new products a year. largely replaced the traditional “ball” driven mice. Investing Innovation Culture 8 heavily in wireless know-how well in advance of the market has, Strategic Innovation Focus 9 in turn, allowed Logitech to launch products way ahead of New Products 8 the competition. The company has also been at the vanguard Managed Growth 9 of rapid product development techniques, investing in new Product Margin 7 technologies and also setting up internal capabilities to Investment in Innovation 7 enable continuous development. Today Logitech has Innovation Brand Impact 8 broadened its product range considerably to include keyboards, Innovation Peer Review 8 web-cams, game-pads, headsets and digital pens, most of which are wireless. Logitech Key 2004 Data 2004 saw the launch of 100 new products including the award- winning diNovo Media Desktop. With annual revenues of Total Revenue $1.268bn $1.27bn, Logitech logged a sixth successive year of record Operating Income $145.6m revenue and profitability. Sales in the OEM market in which it is Operating Margin 11.5% still strong grew by a third, while retail sales passed $1bn for the R&D Investment $61.3m first time. The period between 1998 and 2001 saw Logitech R&D Intensity 4.8% enter the video and audio businesses through a series of R&D Spend / Patent $1.86m medium-sized acquisitions and in May 2004 the company Employees 5,858 acquired Intrigue Technologies to help secure wider access into Revenue / Employee $216.5k IT HARDWARE

SECTOR OV E R V I E W

Every few years the priorities in the IT sector seem to shift. Dramatic improvements in functionality have been enabled I N N OVATION DRIVERS The introduction of the first PCs in the late 1970s changed by the introduction of faster chips, simplified communication perspectives of what a computer was and, in turn, 1979’s protocols, wireless technologies and network servers. The brand owner are far higher than those of an OEM and so Apple II saw our understanding of what constitutes a PC IT hardware sector is a maze of organisations playing in an centres of design excellence in Korea, China and Taiwan are all turned on its head. The 1983 introduction of the first laptop, ever interconnected space. Firms like Intel, ARM, AMD and focusing on switching the balance to home manufacturers the Compass GRID, put the personal into personal Infineon concentrate on chip development; niche operators leading rather than following new trends. From a technology computing, and a year later the Apple Macintosh marked a including Creative, Iomega and Maxtor focus on peripherals; perspective, centres of innovation are also on the move. further shift in how we relate to the box on our desks. companies like Acer, Dell and Apple are broadening out Although Japan is pre-eminent in DVD technology, Korean firms Product developments have come thick and fast in the area from their PC heritage and organisations including Fujitsu, lead LCD development and, through companies like Maxtor, of information technology. PDAs, disk drives, USB memory HP and Toshiba, as well as several traditional consumer Singapore is recognised as the global leader for disc-drive sticks, web-cams, laser printers, colour printers, scanners, electronics companies, are involved in multiple arenas innovation. So where does this leave the more established digital cameras and DVD writers have all become part of including workstations, laptops, printers, monitors, servers, players? IT hardware innovation in Japan, the US and Europe is everyday life for people in the developed world. cameras, projectors and an array of handheld devices. about maintaining a technological lead and ownership of the associated intellectual property in areas like chip design is therefore critical. For ARM, Qualcomm and Intel, designing the new processors that will enable faster computation and ONES TO WATCH: It is no surprise that the IT sector has been a heartland of smoother mobile interaction is the core priority – manufacture innovation for the past thirty years. Beyond the development of is a secondary concern. Other incumbent brands are also • Ac e r , originally a Tai w a n e s e OEM manufacturer of individual product ranges, the interaction and inter-operability of seeking to lead the convergence of products and operation laptops, has migrated into a the gamut of peripherals and networks moves us towards the through innovation. From outside the sector, Sony and major retail business with a stream of profitable products delivery of a ubiquitous computing infrastructure, effective Microsoft are playing increasingly strong roles in the creation of to now be a top 5 global innovation is playing a major role in a number of key areas. the de-facto connected multimedia platform for the home, brand in the sector Firstly economics – lower-cost economies are dominating while, from inside, NEC and 3Com are delivering the next • 3Com, creator of the product manufacture and, as entry barriers are lowered, this generation of networked systems. At the same time, Apple is Ethernet connection and a leader in pervasive trend is going to accelerate further. Next up is brand-led successfully using its gifts for marketing and leading-edge networking, is reducing losses innovation – emphasised by the Lenovo takeover of IBM’s PC design and the low-price, high-volume commodity of on the back of effective downloadable music to drive the market for its high-margin iPod investment in technology business, and characterised by low-cost suppliers which are acquisition and development hell-bent on brand building and innovation, in terms of design product range. and performance. The margins that can be commanded from a MEDICAL DEVICES

P R O F I L E : M E D T R O N I C

Medtronic’s employees have a great pride in their Understandably then, Medtronic has also been one of the In terms of acquisitions, 2004 saw the purchase of Vertelink work and the impact that their products have on sector’s most active companies in the patents arena. In terms of which gave Medtronic access to new technology for spinal people’s lives. Well recognised as a “best company to corporate strategy, the company complements internal organic fixation devices and TVI for devices that will be able to deliver growth through innovation with focused acquisition of smaller cells, genes and drug to specific tissues. With a full future work for” and a leader in team-building and innovation assets to fill gaps in its broadening portfolio. In 2004 Medtronic product pipeline, the company is making progress in integrating delivery, Medtronic is focused on the treatment of released a range of new products including an image-guided insulin pumps with continuous glucose monitoring systems as a people with chronic disease. The company has system which simplifies brain stimulation surgery for the step towards realising an industry goal of the artificial pancreas, developed implantable products to treat heart failure, treatment of Parkinson’s disease, a stabilizer device used to link and is also developing new neuro-stimulation technology to aid coronary and peripheral vascular disease, movement fainting to heart rhythm disorder, new glucose monitoring epilepsy patients. In addition, MG Biotherapeutics, an innovative disorders such as Parkinson’s disease, as well as heart systems, new intelligent insulin pumps that calculate dosage joint venture with Genzyme, is laying the seed for longer term valve replacements and therapeutic and diagnostic more accurately and an expanded remote monitoring service growth as cell therapies and medical devices converge on the that securely links patients with both pacemakers and implanted area of tissue engineering. However, perhaps the most devices used for the treatment of diabetes, insulin pump systems to healthcare services. The FDA approved impressive element of Medtronic’s 2004 innovation gastroenterological and urological disorders, spinal the launch of several improved defibrillators, a new generation performance is that two thirds of its current revenues are from and neurosurgery and ear nose and throat surgery. of digital pacemakers and enhanced aortic heart valves, while products introduced in the previous two years. Compare that

Medtronic has made significant investments in R&D Medicare approved payments for a bone graft device. to other leading firm’s targets such as 30% at 3M. and market development which are helping to drive significant growth and expansion of its product range Innovation Scorecard Medtronic Key 2004 Data from the cardiac pacemaker products it first launched Innovation Culture 8 Total Revenue $9.087bn in 1949. Around 10% of revenues are being diverted Strategic Innovation Focus 9 Revenue Increase 18.6% back into R&D, which takes place in 26 research New Products 9 Operating Profit $2.796bn centres around the globe and one fifth of this R&D Managed Growth 8 Profit Margin 30% budget is earmarked specifically for new ventures. Product Margin 9 R&D Intensity 9.4% Investment in Innovation 8 US Patents 242 Innovation Brand Impact 7 R&D Spend / Patent $3.52m Innovation Peer Review 9 Revenue / Employee $284k MEDICAL DEVICES

SECTOR OV E R V I E W

The medical device and diagnostics industry is evolving to agree rapid change that will help to contain expanding ra p i d l y . Demographic and societal changes have converged healthcare costs. As cost-containment spreads to the US on the sector – chronic disease has become more prevalent, from Europe there is also a push to create ‘world pricing’ I N N OVATION DRIVERS the population in the developed world is aging, and, thanks which will have a significant impact on the higher margins to the internet, patients are increasingly better informed. currently being achieved in the US, where the majority of As with other sectors, topics such as new product introduction, There has been steady growth across the whole market and profits in this sector are correspondingly made. Both market portfolio management, the voice of the customer and managing this is expected to continue to rise throughout the century. growth and demands for cost-control alliances and strategic risk are all key concerns in the development and leverage of an Accelerating globalisation and strong growth in the core relationships are playing an ever more important role here. effective innovation capability. However, given the steadily emerging markets of China and India are both important Ho w e v e r , it is the last of the three identified areas, new growing demand for improved medical devices in established factors. In the primary markets of the US, Europe and Japan product introduction, where companies themselves are markets and the swift growth in emerging markets, speed-to- the main challenges are in the areas of healthcare economics, gaining greatest differentiation and value creation. Most market is of particular priority. With the need for FDA approval, reimbursement strategies and new product introduction. companies in the sector envisage future growth of around backed up by successful clinical trails, efficient decision making The first two concerns are the focus of continued 5% annually will be delivered primarily through organic early on in the development process is a capability that many negotiation between the big players such as Stryker, J&J, development of new products. That said, recent activity companies are keen to refine; particularly in the US market Becton Dickenson and Zimmer, regulatory bodies and such as J&J’s $25bn acquisition of Guidant, has also raised the where, even with Medicare, increasing demand is driving prices government policy. The heart of these negotiations has been prospect of further M&A driven growth. out of the reach of many. Innovative solutions which will reduce the burden on the overall healthcare system, while allowing growth in the sector, are seen as a matter of priority. ONES TO WATCH: Consequently innovations in products which can provide early warning of ailment, link remote monitoring to • Smith & Nephew which, having successfully refocused therapeutic delivery and reduce cross-contamination within the its business in high-value field are all gaining widespread attention. In addition, a desire for devices, is growing steadily, especially in the US minimally invasive treatments and improved diagnostic orthopaedics market, and has techniques are significant areas of innovation focus. As in other a good product pipeline sectors, as Asian markets expand, in-depth, accurate predictive • Boston Scientific, a company market knowledge to steer innovation priorities is also that has around 60% of the key drug-coated stent becoming critical. market, grew revenues by 60% in 2004 and has a broadening range of new technologies in development. S O F T WA R E P R O F I L E : M I C R O S O F T

Microsoft’s scale has not prejudiced its ability to innovate. In the arena of large company innovation, Microsoft is A key ingredient of Microsoft’s long-term success has been the With some questioning whether the fast pace of growth can one of the few organisations that has proven it can deliver successfully despite its size and diversity. Under way in which the culture and structure of the organisation work continue, the focus is currently on newer areas of the Microsoft increasing pressure from long-term rivals and new stars such as Google, core business growth has come from to allow it to operate with a small-company feel. A passion for empire such as MSN and entertainment which, in 2004, customers and technology, allied to a willingness to take on big reported a profit for the first time. Although Sony’s PlayStation selling software to around 90% of the world’s PCs – helping to generate over $10bn in cash each year. Microsoft challenges, point to some of the cultural norms that consistently consoles have significantly outsold Microsoft’s X-Box 5 to 1, the is however also a top 10 investor in R&D world-wide, has a sector-leading track record in gaining patents and result in Microsoft’s reputation as one of the top places to work recently launched X-Box Live, a subscription service, has been has been a model of organic growth with a preference for only making ‘small’ acquisitions, usually to get hold of worldwide. Widespread project-based working, coupled with well received and includes features not found on Sony’s current expertise in key markets. Its innovation pipeline is full and includes a mix of both incremental improvements to an expectation of regular changes of individual roles, help to PlayStation PS2. New X-Box games like Halo 2 have been very existing products as a well as a range of major new developments in areas such as speech recognition. maintain momentum, broaden personal experience and share good sellers and the X-Box 2 is being launched in 2005, a year ideas. Above and beyond this is the strong sense of pride in and ahead of the PlayStation 3 and the new Nintendo Game Cube. across the organisation, extending from the company’s leading New MSN search facilities and design improvements are business reputation to its charitable donations and the excellent targeted at gaining market share from both Yahoo and Google. workspace environment. From a strategic perspective, with a In addition, Microsoft Research is leading the way in developing widespread concept of integrated innovation and a very strong new technologies to improve human/computer interaction, IP position, the company aims to lead and license technological information retrieval and security for mobile devices. All in all, solutions that become partner and sector standards. To help despite ever-eager competition, with its massive investment in secure its future position, Microsoft uses its corporate research R&D, strong consumer focus and the deepest pockets labs around the world to link into emerging developments and imaginable, Microsoft remains in a very strong, but not effect fast technology transfer into the core business. guaranteed, innovation position.

Innovation Scorecard Microsoft Key 2004 Data

Innovation Culture 8 Total Revenue $36.8bn Strategic Innovation Focus 8 Revenue Growth 14.4% New Products 7 Operating Income $9.03bn Managed Growth 9 Operating Margin 25% Product Margin 10 US Patents 659 Investment in Innovation 9 Total Assets $92.39bn Innovation Brand Impact 8 Brand Value $61.32bn Innovation Peer Review 7 Revenue / Employee $645k S O F T WA R E

ONES TO WATCH:

• Google, the most popular search engine and a source of a host of new innovations, is showing significant I N N OVATION DRIVERS growth post-IPO. 2004 profits were $399m on a revenue of $3.19bn up With increased integration of products and cross-sector over 250% • Adobe, the pervasive digital imaging migration of core systems, innovation in the software sector is and document company, with an presently being driven by four core elements: Firstly, failure to effective team-based culture, has built meet launch date, long an industry characteristic, is a major area on its PhotoShop / Acrobat heritage to launch an Intelligent Document of focus which many companies have successfully addressed but Platform remains an issue. Although improved, time-to-market remains a key concern as missing launch date has immediate an impact on both revenues and reputation. Alongside this, the need to either set, or help consolidate, industry and platform standards continues to play a strong hand. This continues to be a strength SECTOR OV E R V I E W of the likes of Microsoft, Oracle, SAP, Adobe and Symantec. Thirdly, in terms of innovation delivery, partnerships with a wide After a three-year slide in sales, 2004 was a year for and Dorling Kindersley in education. Amongst those range of adjacent sectors from entertainment and sports to IT recovery in the sector, thanks mainly to increased IT working across the sector, Symantec, Google, Adobe and hardware and business services are increasingly significant. spending in many companies. In this highly competitive Corel all have their niche and Microsoft is naturally involved These partnerships can provide both the content and key industry, growth fuelled by new products is a primary driver in many areas. In addition, Linux’s open source philosophy is routes to market for the latest products. Finally, and paramount of performance and company valuation. Essentially causing disruption to the business applications and operating in an age of rapid ascent and descent, is the need to correctly separating into two distinct markets, business and consumer, systems fields and taking market share. While the business read the market, identifying and satisfying emerging needs, and there are however a number of companies that provide market is growing, it is still influenced by economic cycles; effectively delivering multi-platform products that allow software products across the spectrum. In the business the consumer market on the other hand is simply growing. consistent ease of use and continue to lay the ground for sphere, the main players are firms like Oracle / Peoplesoft, Across the developed economies, more sophisticated increasing ubiquity. SAP, Siebel and Ariba that focus on enterprise management, software, some operating across different platforms, is at data warehousing, CRM, HR and supply chain management. the core of growth and, in developing economies, software In the consumer arena, companies like EA are strong in to enable the broadening IT infrastructure is primary. gaming, Real Networks and Apple’s iTunes in media players T E L E C O M M U N I C AT I O N S

P R O F I L E : N O K I A The company has restructured into four new divisions to focus solutions sales all increased substantially while infrastructure on multimedia, business, mass-market and operator issues. In sales expanded in India, Russia, the Middle East and Africa. With line with its well recognised slogan, the organisation also focuses continued high levels of investment in technology, design and Nokia’s highly memorable strap-line “connecting on connecting people in teams in order to reach their goals insight, future options include a major role in the provision of faster and this project approach relies on moving people around mobile digital TV. Nokia has strong growth in patents, brand people” is as symbolic of its organisational ethos as it is to broaden perspectives and share knowledge. The customer is value and network contracts and, despite intensifying of its core product. A move from tyres to mobile king to Nokia, which relies on its world-leading innovation competition in areas such as customised handsets, sees steady phones may not seem the most natural, but it typifies insight capability to give it “the ability to anticipate emerging growth ahead. Nokia’s business approach of seeing an opportunity needs and create solutions to fill them.” Keeping on its and grabbing it. Since first making the link between the corporate toes, the company regularly looks beyond new Innovation Scorecard disparate Finnish population and the potential for products at new ways of working. Strategically, Nokia plays a Innovation Culture 9 wireless communication, Nokia has used innovation lead role in all aspects of the industry – in handsets, networks, Strategic Innovation Focus 8 as a key driver – first in developing mobile phone operating systems and new gaming software. This not only keeps a balance of activity and risk, but also allows for the New Products 9 networks and pioneering GSM, then in competing company to be more vertically integrated than any of its Managed Growth 9 successfully with its Nordic counterpart Ericsson and, competitors and hence to more easily innovate across the Product Margin 8 at the turn of the century, in re-inventing the concept whole space at once. After a blip in 2003 the company regained Investment in Innovation 9 of product personalisation. This last move turned what focus, responding with new products that took the concept of Innovation Brand Impact 9 had been a technology-led sector into a design-led one. mobile communication the next step forward. Innovation Peer Review 9 Ho w e v e r , this has not all happened by accident; the In 2004 Nokia won back market share to double that of its company has invested heavily in R&D from day one and nearest rival, Motorola. The company sold over 200m phones Nokia Key 2004 Data used its influence to create one of the world’s leading and released 36 new devices, nearly all with cameras and Total Revenue ¤29.3bn innovation clusters in Southern Finland. Nokia colour screens. At the high end the 7710 wide-screen Gross Margin 38% accounts for over half of Finland’s R&D spend and was, multimedia smart-phone attracted attention with its pen input Operating Profit ¤4.3bn at one time, the focus for strategic investment of up to and individual handwriting recognition and helped maintain the average margin on mobile phones at over 20%. As some Mobile phone market share 31.2% 20% of the Finnish government’s R&D funds. But it’s competitors such as Siemens lost money, Nokia upped the ante Brand Value $24.0bn not just about R&D. Logistical prowess, a flexible with aggressive pricing of some handsets and the launch of two R&D Investment ¤3.7bn structure and an egalitarian culture all play their part. new low-end models specifically for the Asian and La t i n R&D Spend / Patent ¤5.20m American markets. Multimedia, networks and enterprise Revenue / Employee ¤563.5k T E L E C O M M U N I C AT I O N S

ONES TO WATCH: I N N OVATION DRIVERS

• BT has regained focus, especially in Market share is the factor that gets most attention as an between the competing suppliers. It is here, in these product R&D, made commercially-or i e n t a t e d outcome of successful innovation and of the 684m mobile bundles, that established players such as BT and France Telecom innovation a CEO responsibility and is developing a number of successful phones sold in 2004, Nokia came top with a 31.2% share. are strongest as they can deploy new technologies over their external partnerships Sounds good, but the real issue is what margin is being made on f u l l y-owned networks. Uniting the mobile and fixed-line • Juniper Networks the high growth these sales and the main factors in this are brand, design and services, a core area for growth is in the convergent area of company providing IP networks to cost. All of the top three – Nokia, Motorola and Samsung – high-speed wireless connection for laptops, phones and PDAs. many telecom operators is taking market share off larger rival Cisco have good brand recognition. Since 1999, when Nokia Here the adoption of technologies such as 3G, wi-fi and through technical leadership invented the “fashion phone”, design has become a key wireless broadband to create ubiquitous connectivity is differentiator in this sector and an area where the competing attracting much attention with a host of innovative partnerships companies are continually playing leap-frog and pushing new between, for example, T-Mobile and Starbucks, BT Openzone concepts. In terms of production costs, most companies and Hilton Hotels, i-Tunes and Motorola, as well as a growth in operate at similar levels but there are significant differences in wireless intermediaries like Boingo. SECTOR OV E R V I E W the prices that their products can command. To maintain high prices, products such as smart phones are key. Sales of these The telecommunications sector is made up of multiple This has been followed in the past few years by increasing continue to grow, led by Nokia, Palm, HP and RIM, and are layers of different activities, provided by a mix of long- convergence that has brought the two core systems expected to be a major arena for further flagship product established companies and relative newcomers. Alongside t o g e t h e r, thanks to technical developments enabling innovation. Overall mobile device sales are expected to grow network operators like Deutsche Telecom and equipment cordless communication, broadband DSL providing high by 10% in 2005 and nearly half are expected to feature inbuilt providers such as Ericsson are a myriad of enabling speed connection and industry consolidation from a cameras and colour screens. For the mobile networks, market companies, manufacturers of the phones themselves and plethora of privatisations, mergers, acquisitions and new share is underpinned by ARPU and so they naturally want to new IP-based system operators such as the free service entrants. Across this arguably complex industry there are encourage higher use per customer. For example, Vodafone has Skype. Across all this, after nearly a century of gradual surprisingly only several core business drivers: For used its Vodafone Live service innovation to encourage around development from telegraph to increasingly sophisticated companies that own or manage customers, the key metric 15% of its 150,000 customers to use data services and in so fixed-line communication there was an initial divergence has for some time been number of customers and average doing has kept ARPU high. For fixed-line communications, created by the newer mobile telecommunication businesses revenue per user (ARPU), while for the providers of broadband increase is driving a number of market innovations. such as Orange, Cingular and Vodafone that supported a equipment and services alike it is all about operating Globally over 150m homes are now connected to broadband largely parallel wireless system. margins and market share. networks. As this broadband access increases, prices are falling and all companies are putting together a more attractive triple- play of voice, video and data services to tempt users to switch P H A R M AC E U T I C A L S P R O F I L E : N OVO NORDISK

Novo Nordisk breaks the mould for pharmaceutical innovators both in terms of its core activities and its The company’s vision is largely built around diabetes care. flat, this company is currently aiming to achieve target revenue homeland. Since its foundation in 1923, this Danish company has developed the broadest product portfolio in the Novo Nordisk helps put the research activities into the wider and operating profit growth of 15% per annum with an industry in its chosen area of specialisation – diabetes. This is one of four chronic diseases that account for 50% context with particular focus on how innovation can play across operating margin of 25%. Against these targets, in 2004 sales the board. Its values, such as “accountability”, “ambitious” and were up 11% on 2003, operating profit was up 9% and the of global mortality and incidence of the illness is rising. The increase of obesity in the developed world is driving “ready for change”, help embed this vision in the company’s operating margin was 24%. Going forward, the rising demand the rise in cases of type 2 diabetes, especially in children. While new sufferers are clients for Novo Nordisk’s culture and make it a challenging place to work with a strong for new solutions for increasing diabetes worldwide is expected products, this is a business that is passionate about both the treatment and prevention of the illness. As such, the meritocracy that attracts and retains the best. Novo Nordisk to drive the company to meet these targets. company invests in preventative research and shares its knowledge with a number of organisations in Europe, also clearly targets unmet needs rather than providing India and China focused on halting the rise in obesity. In addition, Novo Nordisk has a track record of leading the incremental improvements and, as an illustration, recently Innovation Scorecard field in both drug development and drug delivery devices. Amongst a series of innovations, in 1985 the company terminated the development of one of its oral anti-diabetic launched the NovoPen, an award-winning injection system with replaceable insulin cartridges, and in 2001, the products on the basis of insufficient competitive advantage. The Innovation Culture 8 company is resolutely independent and focused on organic Strategic Innovation Focus 9 world’s first combined blood glucose monitor and insulin injection system. rather than M&A driven growth. With its clear strategic focus on New Products 7 leading research into diabetes, proteins and their delivery, the Managed Growth 9 company has a majority share in its area of leading competence Product Margin 8 as well as in several additional areas of opportunity. The R&D Investment in Innovation 9 pipeline is strong and, unlike many “big-pharma” competitors, Innovation Brand Impact 8 Novo is in an increasingly healthy patent position. The company Innovation Peer Review 7 is currently working with mouse embryonic stem cells in the search for a long-term cure for diabetes and, in the meantime, Novo Nordisk Key 2004 Data is continuing to develop other new products.

In 2004 the launch of Levemir, a long-acting insulin analogue, Total Revenue DKK29.031bn gave the company a product with improved day-to-day control Revenue Increase 11% of blood glucose levels. There are three new insulin analogues Diabetes Revenue Share 71% in trials, while concepts such as inhaled insulin are entering Operating Profit DKK6.980bn development. Outside diabetic products, five NovoSeven Profit Growth 8.7% derivatives are delivering treatments for intra-cerebral R&D Intensity 15% haemorrhage and there is also a cancer drug in development. Revenue / Employee DKK1.26m At a time when growth in much of the pharmaceutical sector is R&D Spend / Patent DKK64.9m P H A R M AC E U T I C A L S

SECTOR OV E R V I E W

The pharmaceutical industry is one of the biggest in the sector’s annual sales. Corresponding efforts to be stronger world with annual sales of around $470bn. “Big-pharma” in the use of patents to fend off generic competition leave companies such as Pfizer, GSK, Aventis and Merck can and the drug companies accused of driving up overall healthcare I N N OVATION DRIVERS do generate multi-billion dollar profits. However, much of costs or depriving the developing world of life-saving the industry is under increasing pressure to produce medicines. Many in the sector have embarked on large scale The challenges for the sector are significant – cancer and ‘blockbuster’ drugs that will generate annual sales of over M&A which, in the case of GSK and Pfizer, has been justified Alzheimer’s are more complex diseases than those already $1bn. While sector research funding has doubled since on the basis of enhanced R&D and more effective sales and addressed and treatments are taking longer to develop and 1991, the number of new product launches has halved over marketing. Few of the mergers though, have yet to deliver perfect. If potential winners can be identified earlier the a similar period and there are understandable concerns over the goods and many big drug firms have started to in-licence ramifications will be huge. In a sector where success ratios are future profitability. Despite high R&D investments, Lilly, more of their technology and products from outside – so low, a marginal 5 to 10% reduction in the failure rate in Merck, Pfizer, Schering-Plough, Wyeth and Bristol-Myers particularly from biotech start ups. Lilly now has alliances clinical trials would effectively double the number of new Squibb all posted lower margins last year and earnings at with 140 outside firms and 30% of its portfolio is product launches. The industry wants to “fail early and fail Bristol-Myers, Merck and Pfizer are not expected to in-licensed, while Novartis has located its R&D HQ cheap.” US drug companies, especially, are also being squeezed increase until 2008. As patents expire, competition from in Massachusetts to be close to start ups and leading by falling margins, generic competition and regulatory scrutiny generic drug makers is expected to threaten one fifth of the academics. and so are needing to improve efficiency. As well as R&D effectiveness some, such as Pfizer, are now looking at their sales The industry estimates that out of 10,000 candidates in the lab, and marketing activities. Reinventing how the products are sold only 10 ever reach clinical trails and only one in five of these is a current challenge, with reducing the size of overly-large ONES TO WATCH: makes it to market. The common view is that the typical new sales forces top of the list. There is also a wider argument that drug development process takes 15 years and costs $900m. the sector actually needs to reinvent its business model and, like • Genzyme, the fast-growing biotech which invests heavily With the beneficial impact of new technologies from the human other sectors, several drug companies are looking to outsource in its efficient research genome product falling short of expectations, current innovation some functions and squeeze the supply chain. Conducting programmes, has focused much attention in addressing effort is looking at how to use combinational chemistry and research in China is also an arena receiving much attention. relatively obscure, potentially high-throughput screening more appropriately and find new With its growing pharmaceutical market, significant tax fatal genetic diseases approaches such as in-silico biology to identify the most incentives, cheaper clinical trails, over 200,000 research • Eli Lilly, one the independent significant targets. The key challenge is to unify the new scientists and several leading research institutions, working majors, which although suffering a recent drop in technological breakthroughs with depth of prior knowledge and more closely with Chinese partners has become a priority for patents and revenue, is now experience to get the right blend of skills and disciplines to many major firms. GSK, Roche and AstraZeneca all have gaining the benefit from its active programmes. open innovation approach deliver the much needed results. with a healthier pipeline FOOD & DRINK

P R O F I L E : P E P S I C O PepsiCo has maintained a fine balance between satisfying the In 2004 PepsiCo launched a raft of new products – several new increasing demand for snack foods with the drive for more flavours were added to the SoBe Lean range of sugar-free, low- sustainable, healthy products. It has cleverly managed to bridge calorie drinks, complemented by the launch of Tro p i c a n a ’ s With a growing consumer demand for healthy the conflicting trends of health and convenience. In the last two reduced calorie and sugar orange juice drink. Pepsi Cola North years there has been a major drive to remove hydrogenated fats America introduced two new beverages in the Aquafina range products in the food and drink market, PepsiCo is from many existing snack products, coupled with a pledge that and ready-t o -drink iced teas and coffees via joint ventures with successfully bridging the gap between health and 50% of new products will use, where possible, “healthy” Lipton and Starbucks. Considerable effort is also being put into convenience. The organisation was born in 1965 as a ingredients or offer health benefits. Independent evidence even areas such as flavoured natural water. Fri t o- L ay snacks, including result of the merger of the two companies – Pepsi- shows that tortilla chips with trans-fats removed can help lower Lays, Ruffles and Doritos, were repackaged to reflect the Cola and Frito-Lay. Since then it has grown to be the cholesterol. PepsiCo’s efforts to promote healthy living have paid removal of hydrogenated fats and the “WOW!” range of snack sixth ranked food and drink company in the world and of f , with Tropicana’s Light ‘n’ Healthy drink being the first juice products cooked in olestra were re-branded as “Light”. In fourth in the US. Pepsi-Cola, with its Pepsi, Mountain brand to be awarded Weight Watchers Value Points. However, addition to healthier food, PepsiCo has continued to introduce its Dew and 7-Up brands, is probably the most on a pragmatic note, whilst keeping a close eye on the healthy well-known products with new flavours that reflect local ethnicity side of snacks, PepsiCo has maintained its policy of continuous and taste. PepsiCo’s strategy for 2005 is to develop emerging recognised business in the organisation, but beverages innovation in the core business areas based on the three pillars markets such as India and China through adopting the same represent just 38% of overall revenue; 57% comes of broadening variety, extending platforms, and improving position as in the developed countries – innovating through local from snack brands like Frito-Lay, Walkers, Doritos and performance. This innovation strategy, coupled with a focus on relevance, promoting healthy living and rolling out its “Smart Quavers with the remaining 5% from the third core building local relevance and the promotion of healthy living has Choice” campaign first launched in the US. PepsiCo business - Quaker Foods. Recently, the drive continued to give PepsiCo’s global brands a lead position. towards cleaner living and the unhealthy image of many of its own brands has been a challenge. But Innovation Scorecard PepsiCo Key 2004 Data despite this, revenues have consistently grown with an increase of 8% in 2004 – a year when the snacks Innovation Culture 7 Total Revenue $29.3bn business, led by brands such as Quaker, Lays and Strategic Innovation Focus 9 Revenue Increase 8% New Products 8 Operating Profit $5.29bn Baked, was number one in the world. Managed Growth 9 Profit Margin 17.9% Product Margin 8 Total Assets $27.98bn Investment in Innovation 8 Trade Mark Applications 81 Innovation Brand Impact 8 Employees 143,000 Innovation Peer Review 7 Revenue / Employee $202k FOOD & DRINK

SECTOR OV E R V I E W

The food and drink market in developed countries is mature due to price erosion, availability of some key raw materials, and competitive. The structure of the sector is increased regulation in food safety, health and traceability I N N OVATION DRIVERS consolidating, as major companies use economy of scale to and the inherent cost of innovation. The impact of the BSE gain market share and there is a strong trend towards epidemic in terms of food regulation cannot be understated. becoming a global business. Demand for year-round seasonal internationalisation. Whilst global brands dominate the Yet, whilst globally 1 billion people suffer from obesity, 800 foods has grown, fuelled by cheap energy costs, though that market, going forward these will be blended with local million go hungry every day. There is no overall problem of could all change due to the challenges to security of energy preferences to meet the growing consumer demand for world food supply, more one of food distribution. The supply. At a local level, thanks to the move from traditional local products. Consumer demand in developed countries is expected global population rise, chiefly in the developing family meal times to snacking and dashboard dining, food driven by convenience, health and pleasure. Desires for low world, will further increase pressure. In recent years, distribution has been increasingly through non-traditional carbohydrate and organic foods have hit the industry hard, mergers and acquisitions have led to the creation of huge convenience outlets such as petrol stations, kiosks, video shops with brands like Unilever’s Slimfast being particularly hard corporations that dominate the sector – PepsiCo, Nestle and vending machines. The net result is a growing amount of hit by Atkins mania. The drive towards organic is not visible and Unilever are just three of the big six. It’s a similar picture foods that can be prepared in less than 15 minutes and in all markets, but there is an issue of increased in the food retail sector, with major players Carrefour and “snacked”. Consumer influences include: busier lifestyles; mainstreaming of natural foods. There is additional pressure Tesco gaining increasing influence on the food chain. health, nutrition and safety concerns; environmental and ethical concerns; migration and demand for ethnic foods. Although taste is still the primary factor in most food and drink choice, nutrition now ranks a close second. Companies have been ONES TO WATCH: quick to seize on this demand for functional food and drink – products that either have some specific nutritional or dietary • Danone, the world leader in fresh dairy products and benefit; or at least can be targeted as such. The buzzword here packaged water and number is neutraceuticals. The production of such foods includes two in cereal biscuits and snacks is growing well on the Innovation programmes in the food and drink manufacturing biotechnology and genetic modification to develop better back of extending reach and sector are driven by trends in diet and health, technology, texture and flavour, longer shelf life and easier shipment, better new products farming and the environment, plus demographic and social yield and higher nutrient value. Producers are keen to show • Cadbury Schweppes is change. However, far and away the sector’s biggest driver for progress in addressing the issues of trans-fats in snack food, aggressively creating new products and developing new change is globalisation. The international integration of markets particularly in the light of rumours of an obesity tax being levied markets. The Smart Var i e t y means that cross-border trade is increasing and retail is in the US and UK. strategy is working well and the confectionery platform is being strengthened B A N K I N G

P R O F I L E : R B S Before the NatWest takeover, RBS drew most attention for In 2004 total income increased by 18%. Churchill helped boost establishing Direct Line in 1985 – the first UK insurance the insurance business by £1bn, and this was complemented by From its domestic origins the Royal Bank of Scotland has grown to become a major global banking operation. company to use the telephone as its main channel and so significant growth across corporate banking, retail banking and The majority of its success over the last decade has been achieved through a combination of organic growth, replace middle men with speed. Though now a global player, direct operations. In terms of profit, it was organic growth internal innovation and significant acquisitions. Takeover activity has included shelling out £21bn for NatWest the company remains strongest in the UK where it holds the which contributed most to the 2004 figures – four times the bank in 2000, buying Churchill Insurance in 2003 and, most recently, the acquisition of Citizens and Charter One number one position for corporate, small business, private and profits arising from acquisitions, while the critical cost / income banks in the US. Over 30m customers signal how far RBS has come since its foundation in 1727. RBS’s 2004 offshore banking, asset finance and motor insurance. Add that to ratio was held at 40%. New products included the MINT credit performance continued to demonstrate the company’s growth capability: The organisation is now the second its position as number two in retail banking, general insurance card, top-up services for mobile phones, a joint credit card largest bank in Europe, the tenth largest in the US and the fifth largest by market capitalisation in the world. and credit cards and it is clear that RBS remains fully active in its venture with Kroger in the US and loan products in partnerships home market. Also in the UK, the company has gained access with Tchibo, the leading German retailer. Activity for the financial to a fast growing customer base thought its partnership with markets embraced new execution services going live on Tesco Personal Finance, which now has almost 5m customers. Bloomberg Electronic Trading platform. Internal innovation RBS was also behind the successful launch of the first UK offset developments in 2004 included the launch of new sales-prompt mortgage account with Virgin. This direct model has now been systems across retail banking and a new customer query successfully translated to Germany and the US. A key aspect of management system that saves 8m internal faxes per annum. the RBS strategy is to build strategic options and the Sustaining a profit margin of over 15%, RBS is one of the best corresponding diversity and flexibility mean that growth is not performers in this sector, churning out around £3bn a year in dependent on one particular economic scenario or market excess funds. With new innovation teams operating in both the development. This approach and concomitant benefits are retail banking and insurance areas of the business, continued evident in its recent results. growth in income, profit and earnings looks certain.

Innovation Scorecard RBS Key 2004 Data

Innovation Culture 6 Total Revenue £22.74bn Strategic Innovation Focus 7 Revenue Growth 18% New Products 6 Profit Before Tax £6.92bn Managed Growth 9 Profit Growth 15% Product Margin 8 Cost Income Ratio 40.8% Investment in Innovation 7 Total Assets £583bn Innovation Brand Impact 8 Employees 136,600 Innovation Peer Review 9 Revenue / Employee £166.5k B A N K I N G

ONES TO WATCH:

• Bank of America has used its product I N N OVATION DRIVERS innovation process to create, test and migrate a wide range of profitable new products to expand reach and target Some would argue that there has been little proper innovation new markets. in this sector. Traditionally interest has been on the process and • HSBC, the global #2, has a strong not the product. It can certainly be argued that less attention has growth programme underway with a been spent on the products that are actually being delivered and mix of consumer-focused innovation in developed economies and acquisition this may stem from a widespread view of financial products as in higher-growth regions. commodities rather than opportunities for innovation. Pro d u c t leadership in this sector is a very short-term concept and “me- too” products, 0% credits for example, spread like wildfire. Innovation focus for many has been in product bundling – li n k i n g together core credit, savings and current accounts and, SECTOR OV E R V I E W o c c a s i o n a l l y, insurance products. That said, increased competition means innovative products are beginning to be After several big domestic deals in Europe at the turn of the Similarly, in Japan there are 120 regional banks. Retail banks seen as a way to make consistent and repeatable gains by the c e n t u r y, there has recently been significant further with true international reach are very few, Citigroup and likes of Bank of America. There has also been a strong focus on consolidation in the US and Europe. The Bank of America HSBC being the most visible. Some parts of the sector are, reducing the real or perceived complexity of financial products. took over FleetBoston for $47bn and JP Morgan Chase has h o w e v e r, already truly international – especially those This has been at the core of new entrants like Egg in the UK. bought Bank One for $58bn. Until the fusion of three serving corporate needs – where one US bank, two Swiss Nevertheless, and perhaps more than any other sector, banking Nordic banks, the creation of Fortis in the Benelux and the and one German have the majority of business. Across all is one where internal innovation has focused on improving the SCH takeover of Abbey, cross-border mergers in Europe areas, a key issue is the growing role of regulation as an effectiveness, speed and reliability of product delivery or had, however, been limited. In contrast, ABN Amro, BNP investment driver and particular attention is on the ongoing transaction. Around 15% of the customers of the average and RBS have all been buying up small US banks for some Basel II implementation. Taking the temperature of the financial institution are now using the web. Given the continued time. While US retail banking is growing faster than industry, there is a feeling that growth will continue across rapid increase in the number of transactions occurring every day, Europe’s, it remains more fragmented, with Bank of the board, driven by a combination of new products, taking cost and time out of processes remains a key item on the America, following its FleetBoston acquisition, now the consolidation and further efficiency improvements. innovation agenda. closest thing to a nationwide bank. HOUSEHOLD PRODUCTS

P R O F I L E : The organisational culture is one which encourages innovation level of media investment as a share of revenues in the industry and entrepreneurship through a combination of ambitious new and, recognising the increasing sector need to protect IP, patent RECKITT BENCKISER product targets, fast promotions and annual bonuses of up to output doubled. In addition, productivity increased in all 144% for senior management. Managers have to be very businesses, resulting in considerable growth in sales per flexible and highly mobile, moving regularly across the 70 employee. Going forward, the company plans to maintain its Sustained, sector-leading organic growth for Reckitt operating countries in the company’s interest. Reckitt Benckiser strong growth through the combination of more new products Benckiser has been driven by continuous innovation. is relatively sophisticated in its use of an internet-based system across all of its segments and greater investment in building its Operating primarily in the highly competitive looking at the skills and aspirations of managers in all markets. key brands in 50 major markets. household cleaning products area, the company has This allows leaders to spot when a manager may be ready for a made significant recent progress on the back of a move and helps align aspirations and corporate need to Innovation Scorecard stream of new launches. Formed by a 1999 merger of maintain high levels of consistent high-margin growth across all Innovation Culture 7 two long-established companies – British Reckitt & regions. There is sector-leading use of consumer insight, as Strategic Innovation Focus 8 Colman and Dutch Benckiser –Reckitt Benckiser is observation of customer behaviour both at home and in-store is quickly turned into actionable insights and fed into New Products 7 now one of the world’s top three household goods development programmes. The company also invests in Managed Growth 9 manufacturers. The company is passionate about research to identify new cross-sector trends and highlight new Product Margin 8 delivering new products and demonstrates its consumer attitudes for improved supplier-led innovation. For Investment in Innovation 8 prowess by achieving 40% of net revenues from new example, Reckitt Benckiser successfully read the fragrance Innovation Brand Impact 8 products. Recent growth has been 100% organic with trend, with its new green apple products proving popular. Lastly, Innovation Peer Review 7 no acquisitions and this has delivered around 7% the organisation’s development process has been honed to reduce time-to-market and enable the launch of new products CAGR. This net revenue growth is outpacing much of Reckitt Benckiser Key 2004 Data such as Vanish Oxi-action in record time. the industry and, with the development of what it calls Total Revenues £3.871bn its 15 PowerBrands, the company has achieved In 2004 Reckitt Benckiser’s overall revenues increased by 8%. Operating Profit £759m number one or two positions in 75% of its markets. In health and personal care revenue grew by 16% due to the Gross Margin 54.8% Although Europe provides over half of the company’s new Veet Rasera and the continued rollout of Gaviscon. Other launches included Calgonit Powerball and Electrosol with Jet Operating Margin 19.6% revenues, the US and Australia together account for Dry Action gel in dishwashing and Airwick Aroma Oils in air Media Investment 12.4% of revenues around 30%. care. Within the food portfolio, Frank’s Red Hot Chile and Lime US Trademarks 58 contributed to healthy growth. In support of its brands, the US Patents 63 company increased its marketing spend to achieve the highest Revenue / Employee £168k HOUSEHOLD PRODUCTS

ONES TO WATCH:

• P&G, with a well stocked new product pipeline from improved I N N OVATION DRIVERS consumer understanding and engagement,better cross company interaction and acquisition of some Different areas of this market are experiencing varied levels of promise quicker, easier and more pleasant use. This is having an products from outside innovation as geography, demographics and consumer impact on most new product development, spurring the • Kimberley-Clark, last year’s innovation economics all influence growth in different ways. In personal creation of new ‘system’ products such as wipes and leading to leader, which has a very efficient internal R&D programme delivering a care there is a strong trading-up focus for incremental the desire for improved integration of design into the innovation good new product portfolio, strong innovation as increased consumer demand for convenience in process. Lastly the industry is broadening its sources of new profitability and steady growth emerging markets has, for instance, grown the shower gel ideas, looking at the use of creative lead consumers through to market at the expense of the bar of soap. At the other extreme, bringing insights from adjacent categories. SECTOR OV E R V I E W areas like oral care are in the midst of a period of more radical innovation. Strip breath fresheners, electric toothbrushes, This sector is an amalgam of several sometimes inter-r e l a t e d decisions include convenience, fragrance, confidence and whitening toothpaste and tooth gels are all transforming this product groups, including personal care, oral care, laundry, product effectiveness. In addition, there is the not previously slow-moving market into a leading innovation area. paper products and household cleaning. It is dominated by a insignificant role of the retailers – particularly Wal-Mart. With Across the whole sector, there are several key drivers having a number of multinationals such as Germany’s Beiersdorf, the the US oral care market alone worth $7.4bn and the tangible impact on how and where companies focus their An g l o -Dutch duo of Unilever and Reckitt Benckiser as well household cleaning market now touching $4.5bn, the innovation activities. Customer loyalty to some products is as, US-based concerns - Procter and Gamble, Colgate- opportunities and challenges are evident. With its 8% share relatively low, so brand-switching is a significant issue. To Palmolive, Gillette, Sara Lee and Kimberley Clark. Some of all US retail shopping, Wal-Mart’s buying power is very combat this, companies are all increasing their focus on pharmaceutical corporations also have some involvement in strong. Faced with weakening positions, new partnerships successfully engaging consumers and gaining a better personal and oral care and there are smaller niche players between the key suppliers are likely, with more mega- understanding of their attitudes. Fragrance has emerged as a key including SC Johnson and Cussons. Within highly competitive mergers like the joining of P&G and Gillette possible. There issue, not only directly in the air care market, but also in areas markets, different companies have the leadership in different is also a growing market for low-cost detergents, toilet such as surface cleaners, detergents and laundry products. product groups, primarily driven by the strength of their tissues and soaps available through discount stores, but so far Established fragrances like pine and lemon have been joined by brands. So, for example, Colgate and, with its Crest brand, the impact on the leading players’ market shares has been an increasing array of apple, citrus, floral and herbal aromas. P&G lead the oral care market; Beiersdorf’s Nivea, marginal. With the overall household products market Several organisations have increased the depth of their Un i l e v e r ’s Dove and P&G’s Olay are all strong in personal mature in many regions and future growth targeted at China, partnerships with fragrance experts to put them ahead of the care; and Reckitt Benckiser’s Dettol, Vanish and Ly s o l Eastern Europe and SE Asia, delivering successful pack in this area. That said, convenience is still the largest products help it lead in household cleaning. Across the differentiating innovation is seen by all key players as a innovation driver in the sector - especially given continued se c t o r , the core trends that influence consumers’ purchase primary concern. consumer willingness to pay premium prices for products that CONSUMER ELECTRONICS P R O F I L E : S A M S U N G

Samsung has used innovation to drive itself up-market and, in 2004, joined the exclusive club of companies Key to Samsung’s innovation success has been the decision to Between now and 2010 the company intends to spend $24 posting profits over $10billion. It has made a world leading shift from innovation follower to innovation leader. focus on developing a leading position in the design and billion on new chip-making facilities and has joined forces with Founded in 1969, Samsung Electronics, part of one of Korea’s chaebol conglomerates, was initially a producer of manufacture of memory chips – the essential ingredient in many former innovation leader, Sony, to share the output from a low-cost, me-too products for its domestic market. By 1986 it had R&D centres in Santa Clara and Tokyo, of today’s consumer products. Now the market leader for both ‘seventh-generation’ LCD factory. With a market capitalisation overseas production facilities in Japan, the US and Europe and was the leading manufacturer of microwaves. DRAM and flash memory chips, the company owns a core greater than that of Sony, Samsung is humming and with Nokia Faced with the challenge of sustaining a low-margin, high-volume strategy, in 1993 the company took a key component for its own products, as well as those of major and Intel also on its radar, is unlikely to give way to the decision to invest heavily in R&D and create a corporate culture of ‘innovation in everything’. Employees were competitors Dell, Sony and Nokia. Even components that it competition any time soon. does not make are sourced from the wider Samsung chaebol. encouraged to ‘change everything except their spouses and children’. This corporate reinvention saw Samsung It is now the world’s largest manufacturer of LCD displays for its Innovation Scorecard emerge as a supplier of leading-edge premium products. By 1995 it had record earnings, but the 1997 Asian own and competitors’ laptops and flat-screen TV products. The economic crisis hit hard. Since then the company has sold 100 non-essential businesses, placed more emphasis investment in building a leading-edge design capability has also Innovation Culture 8 on design and doubled its annual marketing budget. played a major role, with design teams now in place across the Strategic Innovation Focus 9 globe. As well as increasing the usability, desirability and New Products 9 performance of Samsung’s technology-led products, the 500 Managed Growth 10 designers are proactive sources of new ideas and design Product Margin 7 concepts that are fed back into R&D to challenge the company’s Investment in Innovation 9 20,000 researchers to push the boundaries for innovation. Innovation Brand Impact 9 Innovation Peer Review 8 2004 was another growth year in all areas of the Samsung business. Having led the trend for clamshell mobile phones, it launched new models including the first handset to work with Samsung Electronics Key 2004 Data both CDMA and GSM systems, the first hard-drive-equipped Total Revenue KRW57.63 trillion mobile and phones with integrated MP3 players. Although Operating income KRW12.02 trillion margins on mobile phones are falling slightly, the company is Net Profit Margin 21% increasing volume, looking to grow market share and wrestle Revenue growth 32% second position from Motorola. Elsewhere Samsung launched the world’s first 512MB flash memory device, a 4 inch Profit growth 81% widescreen LCD display for portable media players, a 57 inch Market Capitalisation KRW73.17 trillion LCD TV and the world’s largest single-panel active organic LED US Patents 1644 display. All this is in addition to a raft of new domestic products. Revenue / Employee KRW655m CONSUMER ELECTRONICS

SECTOR OV E R V I E W

In the past decade or so, the number of players in consumer Alongside the major new international brands such as I N N OVATION DRIVERS electronics has exploded. New markets have created Samsung and LG, hundreds of other makes are found in opportunities for new brands and low-cost manufacture has every high street, supermarket or on-line retailer. Throw techniques or leading edge materials. With the majority of broken free of the stigma of low-quality. As such, traditional ever faster technology development into the mix, and products now assembled in China or Taiwan, competitive leaders such as Philips, Sony, Matsushita and JVC have been product introduction and standardisation have both economic advantages that used to be achieved through joined by a wide range of newcomers. A period of accelerated. The need for common global platforms has also relocation have all but disappeared. Technology leadership or consolidation in the 1980s was driven by an economy-of- encouraged competitors to cooperate in the two DVD quick access to it, is therefore imperative for any innovation scale rationale which no longer applies as, with high quality forums, the MPEG and Bluetooth user groups. With leader. A second major driver for innovation is how the brand OEM suppliers of components for DVD players, TVs, radios consumers eager to get their hands on the latest gizmo, and is positioned, with an increasing acceptability for a single brand and digital cameras now feeding a global market, the despite being increasingly competitive and price conscious, across the whole market. For this to be effective the single barriers to entry as a branded source of products in this this is a market in which many firms are keen to participate. brand has to have the ability to connect with multiple levels of competitive sector have never been lower. consumer. Samsung, Casio and, arguably, Nokia are some of the few who are successfully pulling this off. An alternative strategy, pursued by the likes of Philips, is to partner with multiple leading brands in other sectors to provide innovative joint venture products that connect better with the target ONES TO WATCH: consumers. Recent Philips partnerships include those with Alessi for kitchen appliances, Nike for wearable electronics and, most • LG, Samsung’s Korean peer, has a successful joint venture successfully, Douwe Egberts for the Senseo coffee machine. All with Philips paying dividends The sector is one which clearly displays the volume versus provide good examples of innovative brand stretch. The final and growing market share from its own branded margin strategic option. Many brands target the highest possible major area of innovation focus is in the interaction between products volumes for their low-cost, low-margin products, while others, multiple devices. As multimedia has taken a firm hold in both the • Apple, the niche computer Bang & Olufsen and Bose being prime examples, focus on home and office environments, the need to provide compatible company, is building on its achieving the highest possible margins on their relatively low hardware and software to enable easy connection and file iPod success to play an increasing role in the high volume sales. Common to both is a need to access the latest exchange has driven innovation. end, high-margin space of innovative technologies – be they automated production the consumer electronics industry GENERAL RETAIL

P R O F I L E : T E S C O

On-line shopping, loyalty cards and financial services Core to Tesco’s innovation success has been its focus on In 2004, Tesco entered the digital music download market, are just some of the innovations that have placed Tes c o managing margins. The company’s management excellence and extended its financial services portfolio and expanded its at the top of the global retail chain. Tesco is Britain’s near obsession with efficiency is used to keep prices low or telephone services so that by the end of the year, the company improve service rather than unnecessarily raise margins. Tesco is had 5.2 million UK banking customers, Tesco.com and telecoms leading food retailer and the third largest in the world. indeed very profitable but, by consistently providing better value accounts. Tesco.com is the world's biggest online supermarket Its first store was opened in 1929 in London and, by than its competitors, is not generally perceived as taking and Tesco Personal Finance alone achieved profits of £160 the early 1960s, Tesco was a familiar feature of most advantage of its customers. The company is more likely to million. In Leicester the company also prototyped a successful UK high streets. After joining the eighties trend for develop new products around identified customer needs than to RFID smart-tag programme which is now in the process of being large out-of-town supermarkets, in the 1990s the speculate on possibilities: “Everything we do, every innovation rolled out nationally. Tesco also grew more in terms of scale and company started pioneering many new innovations. It we bring to market, every business decision we take, is driven by revenues in both South East Asia and Eastern Europe. Today the developed new store concepts with Tesco Metro, a our customers”. To enable this to happen, Tesco has led the field company accounts for 29% of UK grocery sales and £1 in every in market insight both at a domestic consumer and international £8 spent in the whole of UK retail. Tesco has the fastest growth city centre store meeting the needs of local shoppers level. In the UK Tesco’s Clubcard provides the company with the of any major retailer, its profits have doubled in less than five and Tesco Express, the first UK petrol station ability to spot emerging trends, attract consumers and influence years and it is one of the top three retailers in the world with convenience store. In1995 the company introduced its the behaviour of secondary customers. These all link with the 2,318 stores. Having conquered the UK and made an impact in Clubcard, the UK’s first customer loyalty card and two or g a n i s a t i o n ’s customer-centric values and how they translate 11 other markets, it looks set to extend still further. years later formed a joint venture with the Royal Bank into the local markets. of Scotland to offer a range of financial services. 2000 marked the start of tesco.com which was built on the Innovation Scorecard Tesco Key 2004 Data back of existing stores and, with low capital spend, was profitable from the start – a key internal requirement. Innovation Culture 7 Total Revenue £33.56bn Tesco’s international operation, which started in 1994, Strategic Innovation Focus 9 Revenue Growth 18.7% has steadily expanded and accounts for half of its total New Products 9 Pre-tax Profit £1.71bn Managed Growth 9 Profit Growth 21.9% retail space. Tesco has market leadership in 6 of its 11 Product Margin 7 Return on Capital 10.5% international markets. Since 2000 there has also been Investment in Innovation 8 Total Stores 2318 an increasing focus on building non-food sales both in Innovation Brand Impact 7 UK Revenue / Employee £162.5k store and on-line with the result that Tesco is now the Innovation Peer Review 9 UK Sales / square ft £1,169 UK ’s largest CD retailer, outselling HMV. GENERAL RETAIL

SECTOR OV E R V I E W

Shopping was the 20th century consumer experience. The In addition, the rise of own-label products and an increasing I N N OVATION DRIVERS advent of the supermarket and the one-stop shop level of migration from food to non-food have fundamentally transformed the dynamics of the food and general retail changed the product mix and how the consumer therefore chain-focused technology such as smart tags. Both are sectors. Pioneered by the likes of Sainsbury’s, Safeway, views the varied brands. The success of George, a low-cost addressing improved efficiency of goods supply and provision, Carrefour and Wal-Mart, the advantages of scale and choice fashion label set up by and available only through Wal-Mart- but are also areas of consumer-focused innovation around were clear. Securing large volume discounts allowed owned stores, is a classic example. As national market share convenience and traceability. In terms of broadening the supermarket retailers to under cut traditional stores and becomes more difficult to build, international expansion by product mix, the migration of food to general product supply greater space meant they could offer as good if not a better the likes of Wal-Mart, Ahold, Carrefour and Tesco is has been followed by service development using the retailer selection of produce. In recent years issues such as out-of- increasingly turning such national retailer brands into global brand as the focal point. Starting with a limited range of joint town planning constraints have led a move towards sector ones, so key challenges include managing increasingly venture financial products, this has spread to loans, insurance, consolidation; opening of smaller stores within communities, complex supply chains, building critical volume in different holidays, car retail and, most recently, energy supply, virtual the incorporation of in-store pharmacies, post offices and countries and maintaining comparable levels of product mobile phone operations and real estate. All are usually travel agencies, joint ventures with BP, Shell and Esso to quality and customer experience. delivered in partnership with leading existing suppliers, but are open forecourt stores and the growth of on-line shopping. positioned around the increasing levels of trust that consumers have with their favourite retailer brand. Many retailers are using the migration of their loyalty cards into their joint venture ONES TO WATCH: services and relationships such as Nectar in the UK to gain new information about their wider customer base that feeds into • Ca r r e f o u r , the worlds largest food retailer which, although detailed segmentation analysis and opportunities for cross suffering in 2004, has made In this highly competitive arena, innovation is rife. Fr o m selling. Retailers can now find out what their customers spend significant international introducing new technology and broadening the product their money on outside the store and can use this to develop investment in its capability to deliver high impact portfolio to positioning the brand and deepening customer new branded-service propositions and improve the levels of pe r f o r m a n c e relationships, there are several key drivers gaining widespread cross selling between groups. Together, these are all providing • Ahold, the Dutch retailer attention. Today’s two main technological sources of innovation the leading retailers with the opportunity to take consumer- that gained widespread are the on-line provisions market and an improved supply- centric innovation to a whole new level. recognition for its constant mass-market innovation in the US a few years back, is re-energised and keen to make an impact MEDIA AND ENTERTAINMENT P R O F I L E : TIME WA R N E R

As the world’s largest media and entertainment organisation, Time Warner is all set to lead the way in delivering Clarity of leadership for innovation and creativity is Time Warner’s 2004 success comes in many guises. With 20 the mass digital future. The 1990s were a period of major change for the company. First was the merger of Time complemented by Time Warner’s agility in identifying and Golden Globe nominations for shows such as Six Feet Under, with Warner Communications, to be followed a few years later by the combination with Turner Broadcasting, exploiting new opportunities. In many complex organisations, twice the number of any other network, HBO has also signed innovation is often limited to me-too products and services, but a global distribution deal with Vodafone to deliver content to owner of TCM and CNN. Then the most talked-about move of all – the takeover by AOL in 2000 making Time at Time Warner the varied business units have been successful mobile phones. Warner Bros and New Line Cinema released Warner the biggest media and entertainment company in the world. Although the AOL takeover did not deliver in several key areas. High-grossing films, award-winning TV an array of movies; winning Oscars and doing well on DVD. initially, the company is now better positioned for success. It has been able to reduce debt, AOL remains the shows and new technologies to accelerate the digital world IPC launched the UK’s first women’s weekly and extended titles largest internet provider in the world and the business has a healthy $1bn cash flow. With a strong stable of have all come from clear strategic intent to lead rather than such as Wallpaper into new markets. AOL delivered AOL music brands including IPC, CNN, HBO, New Line Cinema, Time and Fortune, and the digital distribution channels and follow. Recognising the need for cross-cultural fertilization to and Time Warner Cable launched Video Mail and IP telephony partnerships in place to deliver the content to audiences worldwide, the question was, with all this scale, fuel creativity and enhance cross-business sharing of ideas, the to help bundle video, data and voice forming a triple play of could Time Warner now rise to the challenge and deliver interesting concepts that consumers would spend company launched a new talent development programme with consumer services. As a consequence of these innovations and the emphasis on collaboration and innovation across the the managed growth of the traditional publishing businesses, their money on? divisions. This is now enabling not only fast migration of content Time Warner is now the best financial performer in its sector. from one platform to another, but is also better coordinating Warner Bros became the first studio to gross over $2bn in a cross-selling and cross-promotion of new products and single year and Time Inc.'s 2004 25% share of US advertising releases. In addition, with its leading portfolio of TV channels revenues made it the industry leader. So, in an industry that had and its strong position in cable and internet provision, Time been quiet on the innovation front, the ingredients are in place Warner as a group of organisations is working together on for Time Warner to play a lead role in profitably delivering the driving digital video and text convergence. much-promised digital future.

Innovation Scorecard Time Warner Key 2004 Data

Innovation Culture 7 Total Revenue $43.9bn Strategic Innovation Focus 8 Operating Profit $2.6bn New Products 7 Overall Operating Profit Margin 6% Managed Growth 8 Share of US Magazine Advertising Spend 25% Product Margin 6 Internet Access Customers 29m Investment in Innovation 7 Digital Video Customers 4.7m Innovation Brand Impact 8 US Trademarks 400 Innovation Peer Review 7 Revenue / Employee $548.7k MEDIA AND ENTERTAINMENT

ONES TO WATCH:

•Pixar Inc, which is producing hit after I N N OVATION DRIVERS hit and receiving wide acclaim for its animation prowess, is keen to extend its innovation capability into new areas In any assessment of public broadcasting organisations, there is and follow new directions little doubt over the BBC’s multiple innovation credentials. • BBC Worldwide, the commercial arm However, in the commercial world where ambitions go beyond of the BBC which, although still linked quality and audience reach towards revenue and margin, the to its publicly funded parent, is one of the greatest sources of new concepts drivers of innovation are increasingly focused. Widely available across TV, radio and new media broadband is delivering mass audiences and economies of scale that make new concepts financially viable. The pressure is on for companies to come up with ideas and concepts that leverage content across different distribution platforms such as internet, SECTOR OV E R V I E W mobile and digital TV – and at a reasonable price. This has triggered talk of cable à la carte, offering consumers their own A tradition of diversification and acquisition within the media cable companies in the UK, the move towards digital choice of channels rather than a package. Cable operators are and entertainment world has resulted in the formation of big switchover is accelerating many companies’ interactive consequently having to be more innovative with their multinational companies with wide-ranging activities strategies. A general downturn in newspaper reading has led interactive advertising business models, which may require covering magazines, television, radio, film and books. many publications to move to a compact format to improve heavy investment in new technologies to make them work. Companies jumping on the internet bandwagon in the late- economics and boost readership. 2004 was however a good Digital rights management is a key topic for content owners, but nineties sparked numerous further acquisitions based on year for the movie business with releases including the latest so is the acceptance by consumers that they will need to pay for plans to distribute music, movies and interactive services. Harry Potter, Troy, Finding Neverland and The Incredibles, all the content where iTunes and its competing music download Following the bursting of the bubble and a few years of cost but although revenues were up attendances were down. services have paved the way. The download trend is building up cutting, companies are now once again re-energising This diverse and complex industry operates on three pillars: momentum as consumers are expected to increase spending by interest in digital media but this time in a more realistic way. content, technology and geography. To maximise the around five per cent over the next year – but they are also Many media companies have plans to follow Time Warner revenues from proprietary content, most media expected to become even more demanding in terms of price, into offering internet access through digital channels. In organisations have now changed to a portfolio of digital convenience and speed. Europe the advent of digital TV is driving choice and, technologies to deliver music, film, games and text across a through the combined efforts of BSkyB, Freeview and the variety of channels to as wide a global audience as possible. AU T O M O T I V E P R O F I L E : T OYO TA

With over three quarters of a million vehicles produced in 2004, and half of these in plants outside Japan, the chances of the car in front being a Toyota are ever higher. In 2004 Toyota grew to be the world’s number two manufacturer in terms of volume. Having already successfully met a “Global 10” target of gaining 10% of the world market, the company’s ambition shows no sign of being satisfied and Toyota is now set on 15%. The Toyota’s product development process has been honed so that Finally, with partnerships like the one with Peugeot Citroen company has overtaken Ford and is closing in on GM. Uniquely out of the largest producers Toyota’s average the norm is two years from concept to launch, an industry launching three new small cars in Europe, Toyota’s technology leading achievement. Combined with similarly class-leading and innovation reach is spreading even further. GM’s position as product margin of 6.7% is three times that of GM, which translates to corresponding steady profit stream of manufacturing capability and focused product definition, this has the world’s largest manufacturer looks in serious danger. $10bn a year – far bigger than the combined total for Detroit’s Big Three. The core of this success has been resulted in a portfolio of over 60 successful models in attributed to the “Toyota Way”, a corporate approach to manufacturing that has grown from its quality origins production. Recognising its global positioning and the need to Innovation Scorecard into a wider, near-obsessive devotion to customer satisfaction. The culture of the company is wholly focused both produce and design with local markets in mind, Toyota has around delivering vehicles that are 100% in terms of both product quality and meeting customer requirements. also moved from having 11 factories in 9 countries in 1980 to Innovation Culture 8 This culture pervades the organisation, from R&D and marketing through to sales and operations. having 46 plants in 26 countries supported by design centres in Strategic Innovation Focus 9 Japan, California and France and engineering centres in the US, New Products 9 Japan, Belgium and Thailand. Another factor supporting Toyota’s Managed Growth 9 ability to maintain its highly profitable growth is its wide network Product Margin 9 of privately owned dealers that is organised into four consumer- Investment in Innovation 9 segmented groups that can compete with each other. This has Innovation Brand Impact 9 helped to enable the Lexus brand to successfully take market Innovation Peer Review 9 share from the likes of BMW and Mercedes and is also being used to drive the launch of the Scion brand in the US with Toyota Key 2004 Data specific appeal to Generation Y young customers.

Worldwide Production 7,547,177 Major new products in 2004 included the first two Scion Total Revenue Yen 17,294bn products, edgier versions of its Sienna, Verso and Yaris vehicles and, in the latest update of the Aventis, a new D4D diesel Net Profit Margin 6.7% engine that reduces combined nitrous oxide and particulate R&D Intensity 4.3% emissions to new lows. In the same year, with the introduction US Market Share 12.2% of a second-generation model, sales of the multi-award winning US Patents 484 hybrid Prius increased to over 250,000 and a hybrid version of R&D Spend / Patent Yen 1.536bn the Lexus SUV was also launched ahead of the competition. Revenue / Employee Yen 65.4m AU T O M O T I V E

ONES TO WATCH:

• Honda with a high product margin, huge R&D investment and a clear focus on exploiting its core I N N OVATION DRIVERS competence in engine development is focused on being the best rather than The leaders in the sector in terms of pure profitability, the likes the biggest of Honda, Nissan, Renault and Toyota, have all focused on • Renault which, having invented the MPV concept, led a revolution in steady execution of ambitious yet sensible growth plans. This mainstream car product design and has involved the development of a stream of new models that turned around Nissan, is growing revenues and profits ahead of many are produced and distributed with ever increasing efficiency. competitors Unlike competitors such as GM, Ford and Fiat, these companies have avoided cut-throat price reductions to protect market share, choosing instead to introduce a gradually evolving range of high quality vehicles and new design-led sub-brands such as SECTOR OV E R V I E W Lexus and Infiniti. From outside, this may appear to be indicative of incremental rather than radical innovation, but underneath The automotive sector is in a period of major change. Ford and Volkswagen that often fail to earn more than the there is incessant technological and consumer-led innovation After a century of steady growth, increasing globalisation of cost of their invested capital. On the retail side, across the taking place. Alongside developments in hybrid engines from products, significant over-capacity across the sector, US and Europe the sector is in the midst of a period of Honda and Toyota that combine electric and traditional fossil widespread incentives and longer-term warranty gradual consolidation to increase purchasing power. This is fuel systems, Honda is leading the next generation of diesel programmes are all applying downward pressure on prices being compounded by changes in the structural relationships engines and there is massive investment taking place in GM, and margins. Meanwhile, closer strategic partnerships between dealers and manufacturers driven by block Toyota and Daimler around new hydrogen fuel-cell-based between vehicle manufacturers and suppliers, higher exemption rulings which came into place in 2003. Emerging platforms. At the same time firms like Renault and Ford- owned commodity prices and sub-sector consolidation are markets in Asia, and particularly China, helped to drive Volvo have been introducing a stream of design innovations to increasing the financial strain on the automotive supply strong market growth but, following enthusiastic US and improve passenger and now pedestrian safety. The full chain. With little recent significant M&A activity after the European investment in manufacturing capacity in the exploitation of multiple-variant opportunities for each platform, expensive acquisition of Jaguar by Ford and the wrecking of region, supply is outpacing demand here as well. New which meet niche consumer requirements with a host of space, shareholder value as DaimlerBenz has assimilated Chrysler, innovations such as hybrid vehicles are starting to have a performance and comfort improvements, has also been a major growth in vehicle production has largely been organic. This wider impact and more realistic growth projections, area of innovation activity to support competitive positioning. growth has been led by those such as Toyota, Nissan, Honda continued consolidation and vertical streamlining are the and Hyundai that all make real profits as compared to GM, major themes for the near future. LO G I S T I C S P R O F I L E : U P S

As with many other sectors, the rise and rise of e-commerce has had an impact on the logistics industry. UPS has Central to the growth of UPS is an innovation model that is sites around and a suite of UPS shipping tools was integrated relished the challenge. A regular in the “most respected” lists, UPS is the world’s largest package delivery used for many strategic decisions. This two-by-two matrix into Yahoo! Small Business services. The alliance with eBay was company. Based in Atlanta, it serves more than 200 territories, with a recent takeover of Mail Boxes Etc now differentiates along two dimensions – internally versus externally broadened and a link up with AuctionDrop enabled customers focused opportunities and innovations to be driven through to use UPS Stores to accept items for sale. With continued operates the world’s largest franchise shipping chain and is also the 11th largest airline in the world. From its existing businesses versus entrepreneurial ventures. Each development of new services, incorporation of new foundation in Seattle in 1907 as the American Messenger Company, UPS, as the firm was renamed in 1919, has quadrant has different criteria, different approaches for delivery technologies and expansion of its business alliances, UPS is been quick to take advantage of new opportunities. Its first air-express flights started in 1929 and an and so different organisational and financial requirements: The leading its field and further growth is expected for 2005. intercontinental service between the US and Europe was launched in 1975. The UPS website, which has proved first quadrant encompasses product development focused on to be a vital platform for growth, was first launched in 1994 and by 2000 was providing 6.5m customers a day new services for customers. This is seen as experience-driven Innovation Scorecard with online tracking. 2001 was a year for major acquisitions including Fritz, a global freight forwarder, and First innovation that can’t fail as the risks are largely within UPS’s International Bancorp, a commercial lending company that was integrated into the UPS Capital portfolio of control. The other “can’t fail” quadrant is that of external Innovation Culture 7 opportunities relating to existing businesses. The other two financial service products. As part of a major corporate re-branding programme in 2003, over 3,000 Mail Boxes Strategic Innovation Focus 9 more entrepreneurial quadrants come under a “can fail fast” New Products 7 Etc franchises became UPS Stores. category. Although success is always the ideal, UPS would Managed Growth 8 rather know early that prospects are not good, before investing Product Margin 8 too much resource. Lastly, to drive the fourth externally focused Investment in Innovation 7 entrepreneurial quadrant, UPS has established a strategic Innovation Brand Impact 9 enterprise fund that invests in such opportunities as RFID and Innovation Peer Review 9 fuel-cell technologies. Given the scope of the UPS business this innovation model has been successful, not just because of the UPS Key 2004 Data rigour that it applies to the four different approaches, but also as it provides a common reference that teams working on the Total Revenue $36.6bn opportunities can use to share experiences. Revenue Growth 10.2% In 2004 there was growth in all of UPS’s businesses led by Operating Profit $5.2bn international export which increased volume by 13.5%. In Delivery Volume 3.6bn packages addition the expansion of the massive WorldPort air hub in Delivery Fleet 88,000 Louisville continued to earn numerous awards for the use of UPS Aircraft Fleet 569 technology. On the customer-facing side of the business, the Customers 7.9m per day UPS website was recognised as being one of the most effective Revenue / Employee $103k LO G I S T I C S

SECTOR OV E R V I E W

Essentially covering the whole process of planning, became a key source of competitive advantage and strategic implementing and controlling the flow and storage of goods focus for companies as diverse as Toyota and McDonalds. and services from the point of origin to the point of Also, as many industrial and retail firms have recently I N N OVATION DRIVERS consumption, the logistics industry has been in a state of focused more on their core businesses, third party logistics, continual growth throughout the last century. Now covering where an outside organisation is used to manage all Technology is the main source of innovation in this sector at the capabilities such as purchasing, supplier management, operations from information systems to customer order moment. After the recent growth of some of the main players materials handling, inventory management, warehousing, processing, has been a particular area of major growth. to accommodate an increasingly large customer base, the focus distribution and transport, all with increasing levels of Federal Express, founded in 1971, provided a major push for is on improving clarity and reliability. In the move towards the customer service, the sector has migrated from a plethora the logistics sector with what it sees as the invention of an fully integrated and transparent supply chain, greater visibility of of independent operators into integrated global entities and integrated air/ground network. Essentially this and similar where individual components and packages are as they whiz alliances. With a growing demand for “just in time” moves towards internationally integrated global operations around the world is a major customer need and so is an manufacturing and distribution systems throughout the that can take care of the full door-to-door process have opportunity for logistics companies to add extra value. Web- 1980s and 1990s, companies in the supply chains feeding given rise to developments such as the expansion of national based package tracking was a major move forward for the end-product manufacturers were rated not only on the postal services and a series of acquisitions by the likes of customer and internal innovation is further improving the speed quality of their goods but also on the speed and accuracy of FedEx, UPS and DHL to broaden their coverage and range and accuracy of package registration and monitoring. The key delivery. Effective and efficient internal logistics capabilities of services. technology in this last area is RFID, which, through its ability to have unique information remotely read and written, is Off-shoring and e-commerce have also had a major transforming the way in which the whole sector functions. influence: The first in increasing the volume and frequency Ultimately on track to replace bar codes globally, this of international package delivery and the second, particularly technology has been one which has attracted much attention, with sites like eBay, by increasing volume and the need for both negative in terms of its role in enabling a potential big- confidence and trust in successful completion of delivery. brother society where everything from products to people can be tracked and positive in terms of the associated improvements in supply chain efficiency. ONES TO WATCH:

•FedEx which, with its recent acquisition of Kinko’s, is deepening its opportunities for wider consumer interaction with its increasing range of global services • TPG, the owner of the Dutch Post and TNT, continued to grow in freight forwarding and postal consolidation where it started a UK joint venture with Express Dairies A I R L I N E S P R O F I L E : VIRGIN AT L A N T I C Key to Virgin Atlantic’s success has been a deep understanding become part of the Virgin experience. The beds, wider than Virgin Atlantic has led the journey of the Virgin brand from its counter culture origins to pioneering customer- of consumer motivations and how to satisfy those needs that competitor’s first class products, have won six design awards centric service innovation on the world business stage. Emerging out of the music-centred Virgin Group in 1984, affect passengers’ choice of airline. The company leads the including the IDEA Gold Award for Transport Design. The and identified strongly with the aspirations and personality of chairman Richard Branson, Virgin Atlantic has been market, especially in Upper Class, largely thanks to a mix of company also introduced service enhancements as diverse as pre-eminent in delivering customer-centric, service-led innovation to the airline sector. Growing from its original investment in research, the ability to read the runes of the on-line and self-service group check in, in-flight language UK / US transatlantic base linking London with New York and Miami, Virgin has become a major international market, leading-edge design and, a rare attribute, willingness to courses and an on-board cocktail mixologist! These product global airline, redefining economy and business class travel experience along the way. Entering into a global use humour in its marketing activities. As with many of the other launches, over 4m passengers profitably carried in 2004 and partnership with Singapore Airlines in 1999, Virgin is now the second largest airline in the UK and has continued Virgin companies, the desire to be seen as the consumer’s major further route expansion in India and Nigeria planned for champion is integral to a corporate strategy which is almost anti- 2005, have allowed Virgin Atlantic to regain innovation to lead innovation in the airline industry. Resembling a flying luxury hotel, for Upper Class innovations have corporate. The translation of the associated Virgin brand values leadership from Singapore Airlines and leave the company well embraced limousine services, on-board massage, lounge dry-cleaning, shower and beauty treatments. Economy into all new developments is used as a core guide for innovation positioned for the future. services have seen the roll-out of individual multi-channel entertainment and, in 2003, the introduction of both in the air and on the ground in its Clubhouse lounges. onboard SMS text messaging. As an early purchaser of the Airbus 380, the company is In 2004, while most US airlines plunged more into debt and promising that, from 2008, its service on this aircraft will be correspondingly cut wages and employee numbers, Virgin bigger and better than rivals with more technology and greater Atlantic announced 3,000 new jobs, ordered 26 new Airbus in-flight comfort. In a typically bold move, the company has also A340-600s and launched significant route expansions to the US, gained widespread publicity by signing up to provide $100m Cuba, China and Australia. The company also rolled out its new funding for and then operate the first commercial space flights Upper Class Suite service across much of its fleet – a private bar, with Virgin Galactic’s fleet of five suborbital vehicles to be to the biggest beds in business class and a luxury leather armchair based on Burt Rutan's X-Prize winning SpaceShipOne. to relax on which flips over into a separate bed have now

Innovation Scorecard Virgin Atlantic Key 2004 Data

Innovation Culture 9 Total Revenue £1.272bn Strategic Innovation Focus 8 Profit £20.9m New Products 8 Profit growth 33% Managed Growth 7 Number of Aircraft (on order) 29 (43) Product Margin 6 Number of Destinations 23 Investment in Innovation 9 Number of Passengers Carried 4m Innovation Brand Impact 10 London / New York Market Share 24% Innovation Peer Review 9 In-flight beauty therapists 200 A I R L I N E S

SECTOR OV E R V I E W

Putative space travel apart, the core means of air travel has have gained widespread support in this area. Primary airline I N N OVATION DRIVERS changed little in the past twenty years and, other than growth is focused on China, although building additional increases in scale, is unlikely to do so in the next twenty. capacity on the main US – Europe – Asia routes is also seen Within an increasingly competitive and security conscious Long haul sub-sonic flights in 300 to 500 seat airliners as important. The key change in the structure of the sector market and with margins cut to the bone, in the absence of any dominate the hub-based networks that define most over recent years has been the emergence of low-cost really major technology breakthroughs, the main drivers of international travel. Short-haul flights in smaller jets operate carriers in the domestic / regional sector which, led by consumer-focused innovation for airlines continue to be service, on domestic or regional point-to-point routes. Boeing and SouthWest and JetBlue in the US and Ryanair and EasyJet price, punctuality and alliance membership. Singapore Airlines, Airbus have emerged as the dominant suppliers of larger in Europe, have been a major source of recent passenger Ryanair, British Airways and the Star Alliance have respectively aeroplanes with Airbus being a more popular current choice and revenue growth. The key dynamics by which the sector been strong in these areas. The key challenges for established for many airlines. The new A380 promising to provide measures performance are passenger volumes, yields national carriers and the largely low-cost start-ups alike have capacity of up to 800 if needed, or, more likely, greater (average fares) and load factors (seat occupancy) all of been to create and deliver sustainable, profitable combinations comfort for around 500 passengers, underscores Airbus’s which are oriented around maximising asset utilisation and that attract and retain one or more of the three primary popularity. Brazil’s Embraer and Canada’s Bombardier have margin growth. customer groups – business travellers, city-to-city economy and developed a significant share of the regional jet market and mass-market / low-cost. As the volume of those flying in each of these customer groups continues to rise steadily, innovation around service has been gaining increasing priority. Comfort, ONES TO WATCH: entertainment as well as the quality, or lack of, in-flight food have all become priorities as airlines strive to maximise volume and • Singapore Airlines with its renowned top-line service load factors. across a widening network, including direct flights to LA, now being complemented with its low-cost Silk-Air subsidiary • British Airways which is changing fast, showing resurgence in both business and economy sectors and increasingly profitable on its wide range of long and short haul routes I N N OVATION LEADERS METHODOLO GY I N N OVARO INSIGHT

Accurately assessing innovation performance is a challenge that many have tried to meet. Some have attempted to look solely at one Innovaro is a prominent insight and advisory company, working with many of the world’s major organisations to stimulate, define and particular element of the innovation portfolio, for example brand value, R&D investment or new product introductions, while others deliver innovation. Acknowledged leaders in the field, we provide insight into the key drivers on, and opportunities for, innovation. have tried to gain a cross-sector view. The problem with both of these approaches is that the flavours and importance of the different We are recognised as a prime source of innovation expertise and seen as eminent in accessing five areas of insight: innovation ingredients often vary significantly from one sector to the next. While R&D investment and patent activity are good Market insight: Making sense of the marketplace and clarifying the emerging opportunities indicators of innovation performance in, say, the pharmaceuticals sector, the world of retail innovation is all about new product launches, average margin and increased revenue per store. Consumer insight: Getting under the skin of the consumer to reveal the key influences on decisions Society insight: Providing in-depth understanding of how the world we live in is changing Equally, underneath such top-level views there are a number of internal innovation drivers such as culture, organisational structure Technology insight: Highlighting the sources of the emerging technologies that will change our lives and investment, that underpin long-term innovation capability. In order to gain a deep, insightful and validated perspective on who Organisation insight: Understanding how, why and where leading innovators deliver their potential are the true innovation leaders on a sector-by-sector basis, Innovaro’s annual Innovation Leadership analysis assesses the performance of 1,000 of the world’s top companies against eight key parameters. The individual profiles of the top companies within We work at the leading edge of innovation practice, helping clients to address the key issues and create value. each sector are compared against each other and additional research around the differences in performance of the leading five Our Perspective on Insight companies is undertaken to ensure that the perspectives gained are fully up to date. From this, we identify and profile the Innovation

Leader in each of 20 major sectors and use this to inform opinion. These profiles are the basis of this book. Insight that stimulates, challenges, guides and prioritises corporate activities is an increasingly important factor in delivering successful innovation. Insight drives innovation – so gaining access to the most relevant and up-to-date insight across multiple areas is a capability The eight key areas that we research and input into the assessments are: that many leading companies increasingly need. This is a field that Innovaro has developed as a core arena of expertise. We think of 1. Organisational culture and supporting structure insight as deep-rooted understandings and fresh perspectives about society, markets, technology, organisations and consumers that, 2. Strategic focus on innovation and its role in driving corporate growth when connected in the right way, help to identify and drive commercial ideas that will help to invent and deliver the future. 3. Number of major new product launches and relative success ratios 4. Growth in revenues, profits and market capitalisation If insight, ranging from short-term consumer preferences and market shifts right through to long-term changes in societal structures and priorities, is to have value it must be relevant to the needs and culture of the organisation. In a world of Google, many believe 5. Average margin per product or customer that they have easy access to the latest insights. However, as many now recognise, getting secondary information may be easy, but 6. Investment in innovation-related activities such as R&D and marketing translating this into useful intelligence is not. More than this, having the connections and skills to interrogate data and intelligence, 7. Brand value and human capital growth using the most revealing research techniques with lead consumers or consulting with world leaders in respective fields, is a capability 8. Peer review from within the sector that few organisations truly possess.

In addition, where appropriate, we look at recent intellectual property performance focused on US patents and trademarks as these As our clients have increasingly asked us to guide their innovation decisions, we have built up a class-leading capability in accessing are the best independent objective guide in this area. Together this provides what we believe to be the most accurate view on which and interpreting new developments across the five key areas of insight. Innovaro Insight brings together an extensive range of companies are the most effective innovators in each sector and allows us to highlight the respective key competitive strengths. knowledge in an accessible form to provide clear and succinct views of today and the future, giving organisations greater clarity on the key elements that can be used to stimulate and steer their innovation activities. For more information on this research please contact us at [email protected] C O P Y R I G H T - IMAG E S

Adidas - © Copyright adidas-Salomon AG, 2005

BP - © Copyright BP plc, 2005

Canon - © Copyright Canon Inc. 2005

DSM - © Copyright Koninklijke DSM N.V, 2005

H&M - © Copyright H&M Hennes & Mauritz AB 2005. Photographers: Eric Broms, Magnus Unnar.

Honeywell - © Copyright Honeywell Inc. 2005

Logitech - © Copyright Logitech International SA, 2005

Medtronic - © Copyright Medtronic Inc. 2005

Microsoft - © Copyright Microsoft Corporation, 2005 Reprinted with permission of Microsoft Corporation

Nokia - © Copyright Nokia, 2005.

Novo Nordisk - © Copyright Novo Nordisk A/S, 2005

PepsiCo - © Copyright PepsiCo Inc. 2005 Courtesy The Grocer

RBS - © Copyright RBS plc, 2005

Reckitt Benckiser - © Copyright Reckitt Benckiser plc, 2005

Samsung - © Copyright Samsung Electronics Co. Ltd 2005

Tesco - © Copyright Tesco plc, 2005 Courtesy Tesco

Time Warner - © Copyright Time Warner Inc. 2005

Toyota - © Copyright Toyota Motor Corporation, 2005

UPS - © Copyright United Parcel Service of America Inc. 2005

Virgin Atlantic - © Copyright Virgin Atlantic Airways, 2005 I N N OVATION LEADERS

Innovation leaders are those who are either able to better understand customer requirements and exploit new market opportunities, or access new technologies to deliver successful new products and services. They are seen as the corporate heroes of today. Innovation Leaders are the companies that CEOs want to head up and other organisations try to emulate. As companies in different sectors seek to make the most out of innovation, one question that is often asked is who are the real innovation leaders? Who are the companies that may not be shouting about it, but are actually delivering innovation and gaining direct impact to the top and bottom line? Based on extensive analysis of the performance of the top 1,000 companies across 20 sectors, Innovation Leaders profiles the organisations that are making the most impact today.

I N N OVATION LEADERS

I N N OVA R O. C O M I N N OVA R O. C O M