Title: The CFO Strategist: Driving Innovation for Profitable Growth

Geoff Tuff Principal Monitor Deloitte Deloitte Consulting LLP WHY ARE WE TALKING ABOUT INNOVATION? Innovation is one of the last remaining sources of growth that can create nonlinear economic returns

Innovaon appears to be a universal imperave

For most companies, ignoring innovaon is no longer an opon

But very few succeed at it; in fact, most fail

This is partly because the wrong people are involved WHY ARE WE TALKING ABOUT INNOVATION? Innovation is often frustrating

Low returns poor discipline

high risk (You’d think CFOs would be in the loop, but they’re not) WHY ARE WE TALKING ABOUT INNOVATION? Roles CFOs play regarding where to focus innovation efforts

implement decisions voice in decisions

0% 25% 50% 75% 100%

lead definion/process

Deloitte CFO Signals Survey, provide info/analysis 3rd quarter 2013 WHY ARE WE TALKING ABOUT INNOVATION? Roles CFOs play regarding where to focus innovation efforts

Which industries Implement decisions to enter/exit Lead definion/process Which customers/ markets to serve Provide info/analysis How to compete Voice in decisions

How to create value

Which businesses to grow/shrink Which businesses to acquire/divest Which measures to track most closely Where to focus cost reducon efforts Where to focus innovaon efforts Where to focus new capability investments Deloie CFO Signals Survey, 3rd quarter 2013 0% 25% 50% 75% 100% WHY ARE WE TALKING ABOUT INNOVATION? It’s time to change the way we think and talk about innovation

Economic value for our customers and for ourselves Innovation creating new value

Which is different To our market than invenon or to the world WHY ARE WE TALKING ABOUT INNOVATION? It’s time to change the way we think and talk about innovation

innovation

high cost (or high risk) WHY ARE WE TALKING ABOUT INNOVATION? We’ll cover three themes today related to how CFOs can play a more central role in the innovation system

1. 2. 3. To earn superior Look beyond Innovaon almost results, manage product innovaon never fails due to innovaon efforts to impact other lack of creavity as a porolio and elements of your and almost always engage in analycs business system fails due to lack of discipline

INNOVATION AS PORTFOLIO Successful innovators manage a portfolio of initiatives across ambitions... See the May 2012 issue TRANSFORMATIONAL of Harvard Business Developing breakthroughs Review for “Innovaon

and invenng things for NEW markets that don’t yet exist for the Risk Averse” by Monitor Innovaon

ADJACENT Expanding from exisng business into “new to the ADJACENT (MARKETS & CUSTOMERS) company” business

CORE Opmizing exisng products for

EXISTING exisng customers WHERE TO PLAY

EXISTING INCREMENTAL NEW HOW TO WIN (PRODUCTS & ASSETS)

INNOVATION AS PORTFOLIO The best innovators are explicit about their activity and resources across different ambition levels…

TRANSFORMATIONAL 10%

ADJACENT 70% 20% Average balanced porolio CORE 20% 70% 10%

RETURN ON INVESTMENT INNOVATION AS PORTFOLIO Most companies have portfolios that are heavily core-weighted; trouble comes when they attempt to re-balance

Rebalancing from core to adjacent and transformaonal can be de-risked by: Leapfrogging and § Seeing the future more clearly geng directly to TRANSFORMATIONAL § Understanding market needs more deeply

§ Making beer use of innovaon examples from elsewhere Really stretching ambion from § Playing beer with others CORE into far ADJACENT § Developing soluons that bring the whole power of the business TEN TYPES OF INNOVATION Successful innovators innovate beyond products and integrate multiple types...

Network Process Product System Channel Customer Connecons Signature Complementary How your offerings Engagement with others to or superior methods products and are delivered to Disncve create value for doing your work services customers and users interacons you foster

Profit Model Structure Product Service Brand The way in which Alignment Performance Support and Representaon you make money of your talent Disnguishing features enhancements of your offerings and assets and funconality that surround and business your offerings TEN TYPES OF INNOVATION The top innovators outperform the S&P 500 . . .

5-Year Indexed Stock Price Returns of the Top Innovators vs. S&P 500

200

150 All “top innovators” 138 companies

100 S&P 500

Stock Price (indexed to 100) 50

0 2007 2008 2009 2010 2011 TEN TYPES OF INNOVATION . . . and integrating more types of innovation delivers superior financial returns

5-Year Indexed Stock Price Returns of the Top Innovators vs. S&P 500

200 5+ Types of Innovaon 45 companies 3–4 Types of Innovaon 150 59 companies 1–2 Types of Innovaon 100 34 companies S&P 500

Stock Price (indexed to 100) 50

0 2007 2008 2009 2010 2011 TEN TYPES OF INNOVATION Reforming fashion design without designers

Threadless A community-based t-shirt company with an ongoing, open call for design submissions

6 TYPES: TEN TYPES OF INNOVATION Redefining the value chain to provide high-quality housing to the low-income segment

Patrimonio Hoy by Cemex Servicing low-income, rural homebuilders in Mexico

6 TYPES: TEN TYPES OF INNOVATION The Ten Types of Innovation—exploded and explored

Premium Merger/Acquision Organizaonal Process Superior Product Complements Try Before You Buy Diversificaon Co-Branding Experience Cost Leadership Consolidaon Design Standardizaon Ease of Use Extensions/Plug-ins Guarantee Flagship Store Brand Leverage Automaon Scaled Transacons Open Innovaon Incenve Systems Localizaon Engaging Product Bundling Loyalty Programs Go Direct Private Label Experience Microtransacons Secondary Markets IT Integraon Process Efficiency Funconality Modular Systems Added Value Non-Tradional Brand Extension Simplificaon Forced Scarcity Supply Chain Competency Center Flexible Safety Product/Service Concierge Channels Component Curaon Subscripon Integraon Outsourcing Manufacturing Feature Aggregaon Plaorms Total Experience Pop-up Presence Branding Experience Enabling Membership Complementary Corporate Process Automaon Added Funconality Integrated Offering Management Indirect Distribuon Transparency Mastery Installed Base Partnering University Crowdsourcing Performance Supplementary Mul-Level Values Alignment Autonomy and Switchboard Alliances Decentralized On-Demand Simplificaon Service Markeng Cerficaon Authority Aucon Franchising Management Producon Environmental Superior Service Cross-selling Community and User-Defined Coopeon Knowledge Lean Producon Sensivity Personalized Service On-Demand Belonging Freemium Collaboraon Management Logiscs Systems Conservaon User Communies/ Context Specific Personalizaon Flexible Pricing Asset Strategic Design Customizaon Support Systems Experience Center Whimsy and Float Standardizaon Intellectual Property Focus Lease or Loan Personality Financing User Generated Styling Self-Service Status and

Ad-Supported Predicve Analycs Recognion

Licensing Metered Use Bundled Pricing Disaggregate Pricing Risk Sharing

THE TEN TYPES OF INNOVATION Zipcar as a general model ….

Allows people to rent cars by the day or the hour; gas and insurance included

7 TYPES: TEN TYPES OF INNOVATION …for “collaborative consumption”

+ +

7 TYPES using 8 TACTICS: TEN TYPES OF INNOVATION The Ten Types of Innovation and Innovation Ambition

As you increase in your level of ambion, you need to be more disrupve to exisng business models and need to think about layering in more and more innovaon types

FOR TRANSFORMATIONAL INNOVATION You will need coordinated innovaon across mulple (4+), interdependent types.

FOR ADJACENT INNOVATION You’ll need innovaon within mulple types (3-4) around a new market offer.

FOR CORE INNOVATION For innovaon in the core, you will be innovang within independent innovaon types around exisng offers aimed at current customers.

SUBSTITUTING DISCIPLINE FOR CREATIVITY Also, different levels of innovation ambition require different people, motivational factors, and support systems

To achieve transformaon—to do different things— an organizaon has to do things differently. TRANSFORMATIONAL Core and adjacent innovaon can generally be managed by the exisng business structures within an organizaon. Transformaonal innovaon, however, needs separate leadership and procedures. These different levels of innovaon ambion require CORE and ADJACENT differenaon in four key areas of management: 1. Approach 2. Organization 3. Resources and competencies 4. Metrics and incentives WHAT’S NEXT? CFOs can and should accelerate the company’s journey into innovation

§ Understand where innovaon efforts are today

§ Align porolio choices with agreed innovaon ambion

§ Ensure the porolio is appropriately resourced

§ Create a smart metric system and valuaon methodology that reflects the ambion mix

§ Almost always aim for fewer, bolder iniaves

§ Become a strategic partner to other funcons

WHAT’S NEXT? Become an integrated part of the process Be something other than the Innovation person who says no.

Commercial OperationsOperations CFO R&DR&D Strategy WHAT’S NEXT?

Above all, be a catalyst for change and lead!