Page 1 of 25 The Innovation Imperative: How Enterprises Accelerate Industry Competitiveness and Inclusive Development Jaime Augusto Zobel de Ayala, Chairman and Chief Executive Officer, Ayala Corporation Inclusive Innovation Summit 1 June 2017, Thursday Rigodon Ballroom, The Peninsula Manila, Makati City For confirmation Secretary Lopez, a pleasure to be here with you Secretary Fortunato de la Peña, CHED Chairman Patty Licuanan, an old friend, Former Secretary Greg Domingo, who we’ve worked closely with in our APEC year, To our good friends, Dado and Maria Banatao, thank you for everything you do for science in the Philippines and in the work you’re doing in conjunction with BPI, And Doris Ho, an old friend. Thanks, Doris, for leading the way with your great remarks on innovation. Page 2 of 25 I am delighted to be in this Summit. And Secretary Lopez, I can’t think of it being more timely. The country is doing well economically, we’re moving forward, and what a great time that we’re pushing with this agenda. I thought that the only way I can add value to the group and the organizers of this session is to talk about this notion of inclusive innovation within a multi-business setting, which is one that I represent. Innovation and inclusiveness should not just within the purview of small companies and start-ups. There is a role that we play as large companies, and I think Doris highlighted it very well: how all of us have to keep changing and adjusting to these changing times. But before I start on that, I want to congratulate all the organizers. I had the chance to attend part of yesterday, and I thought that the sessions which I was able to listen to—on the hard sciences, on analytics, robotics and artificial intelligence—were just great, and I hope that, for all of us involved here, this will be a tradition that we can continue in the following years. Let me thank you on behalf of the community here for getting this going. Page 3 of 25 The innovation imperative To follow on the remarks of Doris, we live in a world of accelerated change—I think that’s clear to all of us. The breakneck pace of technological progress and new means to create and deliver value have given rise to new possibilities, while dismantling those who were not nimble enough to adapt. You see names there of companies whom we have all dealt with when we were younger, but who now no longer exist or exist in a much smaller way. Page 4 of 25 For big businesses, the implications of this new status quo can actually be quite distressing. A 2012 study by Innosight — a strategy and innovation consulting firm that we’ve worked with in Ayala to better understand and navigate disruption — found that the average lifespan of the top 500 US companies has fallen quite dramatically: From 61 years back in 1958, it went down to 25 years in 1980. By 2012, it further slid to just 18 years. Page 5 of 25 Even more disconcerting is the recent global wave of social unrest. It is well noted that current anti-establishment sentiments are rooted in growing income inequality, lack of access to resources, and the widening gap in the overall quality of life. Thus, I think, regardless of size, a paradigm shift is necessary for enterprises to remain relevant in this day and age. Businesses, and even countries, should realize that what brought success in past years, will not be the same ones that will bring success in the future. Page 6 of 25 So now, we have a new innovation imperative, one that is very much in theme of this conference: Organizations should remain curious, vigilant, and agile enough to respond to rapidly changing technological and behavioral trends. More importantly, however, enterprises must also develop unique but effective ways to address structural gaps and societal needs. And I think that’s the new imperative that we have for all of us in the business sector. Page 7 of 25 Conglomerates accelerate innovation Let me turn to the topic of large enterprises and multi-business groups. I believe that they too play very important roles in driving innovation at an industry and national level. Large enterprises possess a diverse set of capabilities, significant resources, and a wide network—all of which are not easily replicable and can potentially accelerate innovation efforts. Most especially, conglomerates have the incentive and the moral obligation, I believe, to harness these capacities to likewise accelerate progress in the communities that they serve. On this last point, I remember reading quite recently a report published by Dr. Raul Fabella on large business groups and inclusion. In his report, Dr. Fabella posited that large enterprises have the competence and capital to boost a nation’s ability to deliver crucial public goods and promote welfare, most especially when government resources are limited in certain sectors. And we’ve Page 8 of 25 been seeing that dedication to funding and putting capital behind some of the infrastructure needs of the country over the last two decades by local companies. Page 9 of 25 There are examples to draw from across the world. In terms of innovative responses to technological change and market preferences, consider the 125-year old, “Digital Industrial” General Electric. GE remains highly advanced both at the high-end and/or the mass market through its open innovation platforms and partnerships with start-ups. Or consider Apple: Apple continues to be a trailblazer through cutting edge design and the ecosystem it has begun to create. In the field of social impact innovation, global groups such as Coca-Cola and Nestle have institutionalized inclusive business models through community-based entrepreneurship in many of the emerging markets that they deal with. Page 10 of 25 Might I also add that multi-business groups also function as catalysts for entrepreneurial activity on a fairly large scale. We see it in our own experiences within the Ayala group. In our malls, our commercial spaces provide many entrepreneurs a marketplace for their goods or services. Through the bank, we are able to support the needs of various SMEs to grow their businesses. At Manila Water, for example, we engage SMEs and barangay-level businesses to be our contractors and equipment providers. And at companies like Globe Telecom, a network of distributors, dealers, and sari-sari store owners ensure that people would never have to go far to replenish their prepaid credits. So, I would argue that multi-business groups do have a significant capacity to create strong amounts of economic activity, if directed correctly, and consequently, grassroots growth through their broad ecosystem. Page 11 of 25 The Ayala Innovation Story At Ayala, I’m proud to say, we have a long history of innovation that involve, many years ago, establishing the first bank in the country, the first streetcar system, and our pioneering effort in land distribution, and land planning and development. But in recent years, we have taken a more systematic approach to encourage innovation across our established businesses, rather than have them remain static. Coincidentally—and credit to Dado on this—my own renewed approach to innovation, together with our team in Ayala, which I will talk a little later about, started with a conversation with Dado sometime back. I don’t know if he remembers it, but we all remember it because we always reference it on a regular basis. At the time, Dado and us were exploring a renewable energy pilot project Page 12 of 25 for off-grid islands in the Philippines—we were interested in the space, and Dado was also working with his family on making it happen. It was during one of our conversations that Dado said that perhaps Ayala can establish a much more coherent innovation group, and we did not take those words lightly. After that conversation with Dado, we got together within our organization and actually formed it. Page 13 of 25 And thanks to that thought, Dado, we now have Ayala Innovation. It is a think- tank and center of excellence within the corporate center that coordinates many innovation teams across the Group, as well as with our external partners. It’s now structured formally within the group, and it is guided by an Advisory Council, composed of the innovation leads across all our businesses. Page 14 of 25 Ayala Innovation is mandated to perform three key functions, and this is how we instituted it within the setting of a large business group: First, the unit monitors emerging technologies, market trends, and behavioral shifts that may impact our businesses – either as opportunities or threats. Secondly, the unit brings together capabilities across our group, to develop new business concepts and facilitate synergy projects between our business units. The unit also hosts inter-company learning and thinking sessions, market-discovery studies, and a variety of fora and workshops, to continuously catalyze innovation thinking and activity. Page 15 of 25 Allow me also to highlight how we celebrate innovation—so we now have that structure in place, but then to give it impetus, we continue to celebrate the great ideas that come out. Every year we hold group-wide innovation conferences including an “Innovation Olympics” and our annual Innovation Summit, called Spark. The summit brings together the Ayala Innovation community and external experts to surface insights; elicit critical thought; and inspire the community to keep the innovation spirit aflame. So, thank you, Dado, for having inspired us with that thought; and I would also like to thank Paolo Borromeo, who is with us today, who has led that charge and who was part of that conversation originally.