Presentation to University of Michigan - Ross School of Business Innovation class

1. Innovation in Today’s World
Aki Balogh
Diamond Management & Technology Consultants
March 10, 2008

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• Introduction
- Analyst with experience in market strategy, market sizing, analytics, project
management, and IT strategy
- Born in Hungary, resides in Chicago
• Education
- Bachelor of Business Administration, Ross School of Business, University of
Michigan
- Associate Degree in Business Computer Programming, Washtenaw Community
College
Professional Background:
• Aki Balogh is an Analyst with Diamond Management and Technology Consultants. Since joining
Diamond in 2007, Aki has worked on
- Strategic analytics project for a top 3 bottling company
- IT Strategy for the CIO of an $8B transportation company
- Common process roll-out for a top 3 health insurer
• Before Diamond, Aki interned at Microsoft where he performed a market opportunity
assessment for the MS Learning group
Who is Aki?

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Questions around innovation
1. Once a firm has recognized the potential of an innovation, what is the
best way to adopt it?
2. What role does a firm's environment play, if any, in its ability to
innovate?
This presentation will focus on how innovation can be adopted within an
organization. It will also examine the effect of environmental factors.

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Our Understanding
• [Large] companies go out of business all the time
– In the 40 years between 1957 and 1997, 85% of companies on the S&P 500 in 1957
had fallen off the list by 1997
– Only 12 of the 74 survivors outperformed the index
– In 1998, the expected duration of a company on the index was 10 years
• Globalization has given companies access to the best talent, markets, and
resources in the world, resulting in increased competition
• Continuous business renewal is important
– 95% of companies hit a “stall point” in their existence and have only a 1-in-6 chance
of returning to growth
– 40% of commercial airline crashes in the US are due to Continuous Flying Into
Terrain (CFIT). In other words, seasoned experts are being given good information by
reliable instrumentation… and they still crash!
Source: The Calculus of Commerce, John Sviokla.
Honest and vigorous self-renewal is critical to long-term survival.

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What is innovation?
‘Innovation’ is the process of turning an original
idea into a completely new, valuable product (or
service) and bringing it successfully to market.
Innovation = Invention + Commercialization
‘Innovation’ is the process of turning an original
idea into a completely new, valuable product (or
service) and bringing it successfully to market.
Innovation = Invention + Commercialization

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Core Business Enablers
Improving “A” Processes
Improving “B” & Reshaping “A”
5-10%
of average investment
20-30%
of average investment
60-75%
of average investment
Source: Chunka Mui’s Innovation Framework and Diamond Analysis.
Continuous
Discontinuous
What types of innovation exist?
Firm

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How do companies innovate?
Operational and product differentiation model
Structural Innovators launch fewer unsuccessful offerings and bring in
more profit than Incremental Improvers.
Structural innovators combine product differentiation and operational
differentiation to create long-term value
Diamond’s Innovation Framework
Innovation Category vs.
Revenue and Profits
Source: “Structural Innovation for the 21st
Century. “ Diamond Insight. Source: Kim and Mauborgne, “Value Innovation: The Strategic
Logic of High Growth”.
OperationalDifferentiation
Product* Differentiation
* Product Innovation is defined as a customer offering and includes services that are marketed.
Operational
Innovation
Structural
Innovation
Continuous
Improvement/ Best
Practices
Product/Service
Innovation
Zara
US Steel
GE
Motorola
Structural
Innovation
Incremental
Improvements
Firm

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• SIBs: Stay in Business Investments
Investments in infrastructure or
capabilities fundamental to business;
hard to quantify
• ROIs: Project Investments
Investments that take existing
capabilities and make them “faster,
better, cheaper”
• OCIs: Option Creating Investments
Investment with high risk, high reward;
can fundamentally alter competitive
position
Definitions
Source: Diamond Analysis.
Portfolio Investment Model
Companies should manage a portfolio of investments holistically and
should not be afraid to kill unsuccessful investments.
How do companies innovate?
Managing a portfolio of innovation investments
CompetitiveImpact
Advantage
Parity Traditional
ROI
Enabling
SIB
Required
SIB
SIB ROI OCI
Investment Categories
Tactical Strategic
OCI
Exercised
OCI
Firm

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How do companies innovate?
Client examples from Diamond’s work
High-quality, flexible technology platforms are enablers of business
innovation.
Innovation Enablers Capabilities Gained
• Continuous renewal of capabilities
• Ability for quick integration into
integration into technology, platform,
and processes
• Modular infrastructure allows quick
integration of acquisitions
• Rapid evolution of new business
models
• Speed to market
• Real-time decision-making
• Strong capabilities in clinical analytics
• Information-centric IT architecture
• Capability to define and act on
operational rules
• Improved ability to new products that
are demanded in the marketplace
• Enhanced ability to identify risks across
functions
• Faster speed-to-market of products
Source: Diamond Analysis.
Goldman
Sachs
Aetna
Firm

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What impact does a firm’s environment
have on innovation?
There is correlation, but not causation, between technology innovation and
industries. One innovative company can transform industry dynamics.
• Certain industries tend
to be more innovative
than others
• However, sluggish
companies create
opportunity for a faster
entrant to overtake
them.
Examples:
- Cemex in the cement
industry
- Amazon.com
overtaking B&N
- Netflix overtaking
Blockbuster
Example
Drivers
RegulationRegulation
Geography-
dependence
Geography-
dependence
Customer
demands
Customer
demands
Historical
investments
Historical
investments
Source: Diamond Digital IQ Study.
DriversDrivers Technology EnablersTechnology Enablers Ability to InnovateAbility to Innovate
22
23
24
25
26
27
28
29
30
25 26 27 28 29 30 31 32
Utilities
Media
US Federal
Government
Manufacturing
& Distribution
Travel &
Hospitality
Insurance
High Tech
Financial
Services
Healthcare &
Pharma
(Average OO: 25.3)
(Average SO: 29.4)
Consumer Packaged
Goods & Retail
Diamond Digital IQ Industry Index
Strategic IT Quotient
OperationITQuotient
Env’t

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Five Best Practices from Thomas Edison
Source: Innovate Like Edison, Sarah Miller Caldicott.
Toyota
IDEO
Int’l TruckingRoss
Microsoft
Firm

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Learnings and Takeaways
• Innovative companies tend to be more successful
• Innovation is a process, not an event
• Build a strong [technology] foundation to enable innovation
• Sell whole platforms, not products
• One innovative company can transform an entire industry
To be effective innovators, organizations must structure and energize
at all levels to create a culture of innovation.

13. Appendix

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“[the problem] …in the straightforward search for profit and
growth, some very capable executives in some extraordinarily
successful companies, using the best management techniques,
have led their firms toward failure.”
“[the solution] ...established firms that successfully built a strong
market position in a disruptive technology were those that spun
off from the mainstream company an independent, autonomously
operated organization.”
Clayton M. Christensen
The Innovator’s Dilemma:
When New Technologies Cause Great Firms to Fail
Appendix
What is Innovation?

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Core Business Enablers
(CBEs)
Focused Business Improvements
(FBIs)
Technology Driven Innovations
(TDIs or OCIs)
Assets that form the
core IT infrastructure
of the organization
Assets and projects
aimed at incremental
operational gains
Option creating
investments with
power to transform
5-10%
of average portfolio
20-30%
of average portfolio
60-75%
of average portfolio
Business unit level
Enterprise level
Source: Diamond Field Team analysis
Portfolio of
investments in
IT assets and
projects
Appendix
Innovation Framework Applied

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Core Business
Enablers
Focused Business
Improvements
Technology Driven
Innovations
• Keep lights on
• Regulatory compliance
• Network firewall
• Cost per unit of service
• Service levels
• Risk exposure
• IT
• Against budget
• Lowest cost at or
below acceptable risk
• Break compromises
• Create options
• In-store kiosk pilot
• Milestones
• Portfolio ROI target
• Option value
• Business
• Against deliverables
• Try often, kill early
• Seek partners
• Improve operations
• Faster, better, cheaper
• CRM application
• On-time, in-budget
• Project NPV, IRR
• Business objectives
• IT (enterprise)
• Business (unit)
• Against specific
business objectives
• Positive NPV
Objectives
Example
Criteria
Primary
Owner
Manage-
ment
Source: Diamond Field Team analysis.
Appendix
Portfolio Management Theory:
Each category is assessed and managed differently

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Internal and
External
Platforms
Partners/Alliances
Distribution
Brand
Key Assets
People
Technology
Process
Organization
PLATFORM
PLATFORM
Location
Customers
View your products as platforms1
View your business
as a platform
2 Internal
External
Product(s)
Services
Source: Chunka Mui
Appendix
Consider both internal and external platforms

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Appendix
Types of business platforms
Platform Types
Business platforms can be characterized into four types:
“Application Nests”
“Knowledge Flexors”
“Standards Owners”
“Asset-Parlay-ers”
These companies provide a platform
where other host others’ applications.
Examples: Microsoft, Palm
These are companies that own
standards in which others cannot
must conform to.
Example: Visa
These companies have leveraged
their skills and contacts into new
businesses.
Example: UPS, HP
These companies have used existing
assets in new ways to launch follow-
up killer apps.
Example: Wal-Mart
Source: Chunka Mui.

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Source : 3M, Diamond analysis
• General
research
• Focus on
customer needs
• User research
Key
Activities
Interactions
3M has operationalized an innovation process that is heavily dependent on
internal resources and consumer testing.
Marketing,
sales
Marketing,
sales
Corporate
R&D labs
Corporate
R&D labs
ManufacturingManufacturing
• Research
consumer
acceptance
• Technical
definition
• Develomt. • Manuf. and marketing
Appendix
Example of a structured approach: 3M’s innovation process

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Appendix
Innovation through technology: Why does IT matter?
“Companies with high Digital IQ view information technology of both
strategic and operational importance and … [can] harness IT to help power
their companies.”
Question: To what extent do you agree that IT will play a major
role in the strategic success of you r business
Source: Diamond Management & Technology Consultants
IT Plays a Major Role in the Strategic Success of Most Businesses
Totally Agree
Somewhat
Agree
Neither Agree Nor
Disagree
Somewhat Disagree
Totally
Disagree
0% 10% 20% 30% 40% 50% 60%
Business
IT

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Appendix
Who is Diamond Management & Technology Consultants?
• Who we are: Change agents focused on the single biggest disruptive force in our
economy today – Information Technology
• What we do: Create business value through a more insightful understanding and
application of technology and customer needs
Sample Offerings:
• IT Strategy /
Effectiveness
• Product Launches /
Complex Program Mgt.
• Customer Experience
Design
Diamond's service offerings combine understanding of Information
Technology & customer needs
Business
Value
Information
Technology
Customer
Understanding

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Appendix
How does Diamond work?
Business Operations
Strategy&
Analytics
Systems Integrators
and Outsourcers
Execution
Technology
Functionally or
Industry-specific
Consultants
Traditional
Strategy
Consultants
Former Big 5
Consulting Practices
Diamond creates value by solving problems at the intersection of business
and technology.
Integrating
Business and
Technology