November 17, 2009 This document is confidential and is intended solely for the use and information of the client to whom it is addressed. NASSCOM ES Summit Strategies for the age of uncertainty Discussion Document
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November 17, 2009This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
NASSCOM ES SummitStrategies for the age of uncertainty
Discussion Document
Companies today face unique challengesCompanies today face unique challenges
1. Global recessionary slowdown
2. Change in mix of profile of growth markets—from mature to emerging markets
3. Demographic challenges in mature markets—capacity constraints
4. Rapidly changing technologies—growth of electronics, alternate fuels, application of nano materials, etc.
5. Cautious capital environment (leading to unique business models)
6. Focus on increase in R&D efficiency
7. Emergence of paradigm changing low cost competitors
8. …and many others
1. Global recessionary slowdown
2. Change in mix of profile of growth markets—from mature to emerging markets
3. Demographic challenges in mature markets—capacity constraints
4. Rapidly changing technologies—growth of electronics, alternate fuels, application of nano materials, etc.
5. Cautious capital environment (leading to unique business models)
6. Focus on increase in R&D efficiency
7. Emergence of paradigm changing low cost competitors
8. …and many others
1
Recessionary slowdown in mature markets is hastening the focus on emerging markets—especially India and China
Recessionary slowdown in mature markets is hastening the focus on emerging markets—especially India and China
2
Sources: Global Insight (April 2009)
Bubble size proportional to real GDP at PPP(Purchasing Power Parity) in US $billions in 2013
Real Consumer SpendingGrowth 2008–2013
-2%
0%
2%
4%
6%
8%
10%
-2% 0% 2% 4% 6% 8% 10%
GDP Growth2008–2013
China
India
MiddleEast
Africa
Russia
Australia
LatinAmerica
USEastern Europe
Western Europe
Japan
Challenges
Developed markets are facing a significant demographic disadvantage—making emerging markets an ideal supplier and consumer of goods and services
Developed markets are facing a significant demographic disadvantage—making emerging markets an ideal supplier and consumer of goods and services
3
Source: United Nations; Booz & Company analysis
0%
2%
4%
6%
8%
10%
12%
00-04 05-09 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+
Age (Years)
Population Distribution by Age (2007)
Percentage of Population
Japan
US
India
ChinaU
S A
vera
ge
= 3
6
Jap
an
Ave
rage
= 4
3
India
Ave
rage
= 2
7
Ch
ina
Ave
rage
= 3
3
Brazil
Russia
Ru
ssia
ave
rage
= 3
8
Bra
zil A
vera
ge
= 3
0
Challenges
Fast changing technology landscape is driving companies’ to invest larger amount of R&D dollar
Fast changing technology landscape is driving companies’ to invest larger amount of R&D dollar
4
Multi-Purpose Devices Today
Device
Nokia N series
Black-Berry
Sony-Ericsson
Sony PSP
Kodak mc3
Palm Treo 650
Phone
Camera
MP3 Player
PDA
Game Console
Video Player
Radio
Primary Function Secondary Function
Single-Purpose Devices in 1999
PhoneEricsson
T28
CameraOlympus CamediaC-2000Z
MP3 PlayerDiamond
Rio PMP300
PDA Palm III
Game Console
Nintendo Gameboy
Technology Evolution – Telecom Example
Challenges
Economic slowdown has forced companies to look at their R&D/engineering budgets
Economic slowdown has forced companies to look at their R&D/engineering budgets
5
The Performance DisconnectExample Analysis Showing Relation between R&D & Financial Performance
~10,000 analyses found NO statistical relationship between R&D spend and:
� Sales growth
� Gross profit growth
� Operating profit growth
� Operating Margin
� Net profit growth
� Net Margin
� Market cap growth
� Total shareholder return
y = 0.032x + 1.2914
R2 = 0.0114
-5
0
5
0 1 2 3 4 5 6 7
Indexed Sales Growth
Indexed R&D / Sales
Higher R&D spend doesn’t ensure better
performance in terms of growth, profit or shareholder
returns
Challenges
EXAMPLE ANALYSIS
R&D $ spend can increase number of patents, but number or quality of patents DO NOT drive performance
R&D $ spend can increase number of patents, but number or quality of patents DO NOT drive performance
6
y = -0.0053x + 1.5247
R2 = 0.0001
-10
-5
0
5
10
0 1 2 3 4 5 6 7
Indexed Sales Growth
Indexed Patent Count
y = 0.3697x + 47.861
R2 = 0.7249
0
500
1000
1500
2000
2500
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000
Number of Patents
R&D Spend ($M)
R&D $ Spend Drives Number of Patents… …However, Number of Patents Does Not Drive Performance
Challenges
EXAMPLE ANALYSISCOMP & ELECTRONICS EXAMPLE
Companies are taking charge using five primary mechanismsCompanies are taking charge using five primary mechanisms
7
Aligning Innovation Strategy with Corporate
Strategy
Making the “Right Bets”– Portfolio Management
Building the Best Global Network for Cost &
Access
Managing the R&D Pipeline with Speed &
Efficiency
Leveraging Customer Insight & Partner
Network in Ideation
A
B
C
D
E
We will discuss few of these in the next few slides
Aligning innovation strategy with corporate strategyAligning innovation strategy with corporate strategy
8
Direct Customer Insight
Indirect Customer
Insight
Market BackTechnology
Forward
First to MarketFast
Follower
Breakthrough Innovation
Incremental Change
Innovation StrategiesRelative Position On Strategic Elements
Need Seekers – Consistently strive to be 1st movers; Proactively engage customers to determine needs & shape new innovations; Determine new innovations market back
Market Readers – Adopt a 2nd mover strategy; Focus on driving value through incremental change; Innovations determined market back
Technology Drivers – Drive innovation via technological achievement for both incremental and breakthrough efforts; Least proactive of three in directly engaging customers
Three Innovation Strategies
Need Seekers Market Readers Technology Drivers
A
Company response
Leveraging customer insight and partner network in ideation –open innovation
Leveraging customer insight and partner network in ideation –open innovation
9
Open Innovation
Mobility of Labor
Growing Cost PressuresEmergence of New Collaboration Tools
Faster Product Cycles
Drivers of Open Innovation
Availability of Venture Capital Increasingly Sophisticated Customers
� Innovation increasingly expensive as product complexity increases
� Increasing availability of product information to end users
� Consumers demanding more innovation and product improvements
� Shorter time to market as new technologies / processes introduced
� Growing number of product variations to meet diverse consumer needs
� Difficult for companies to contain knowledge within the organization
� Can leverage overseas labor to minimize costs and grow talent pool
� Enable individuals and small companies to commercialize innovative ideas
� Rewards risk-taking innovations
� Internet and other digital tools enable multiparty / cross-border collaboration
� Consumers feedback more efficiently captured via the web
Supply-Side Demand-Side
Company response
B
C. Make the right betsC. Make the right bets
10
Innovation Effectiveness Curve
Returnon
InnovationInvestment
ROI2 Innova-tion
Project(k)
Investment in Project (k)
Project (k) ROI2
Tail
Total Innovation Investments
Raised Innovation
Curve
Healthy Innovation Projects
Current Innovation
Curve
� The innovation effectiveness curve is an intrinsic characteristic of the portfolios value of innovation and future growth prospects
� The Innovation Effectiveness Curve can be drawn by plotting the return for each innovation project against annual project spend
� Area under the curve is the total return on innovation investments
� The larger area under the curve, the greater the firm’s returns on innovation investments
� The length of the “tail” indicates low return projects
� Portfolio “workout” should include review of current projects with:
(1) initial business assumptions
(2) realistic scenarios looking forward
Company response
C
Managing the R&D pipelineManaging the R&D pipeline
11
Ideation Concept Maturation Product Development/Introduction
Open source of ideas from internal and external networks-No boundaries
Frontloading to explore multiple options with rapid iteration around well structured and quantified trade-offs
Disciplined organizations and processes to execute efficiently with minimal wasted effort and re-work…Avoiding processes that create complexity and non-value add bottlenecks
Company response
D
Building the best global network for cost and accessBuilding the best global network for cost and access
12
� No nodes or spokes—business model is centered around the headquarters� No nodes or spokes—business model is centered around the headquarters
Source: Booz & Company analysis
� One hub with three to four spokes
� One hub with a regional node and two to three spokes
� One hub with two regional nodes and two to three spokes
� Three hubs with two to three spokes
Traditional Engineering Network
Hub & Spokes Engineering Network
Regional Engineering Network
International Engineering Network
Global Integrated Engineering Network
Globalization Models for Engineering
1
2
3
4
5
Company response
E
The traditional model, currently dominant, is centered around the headquarters
The traditional model, currently dominant, is centered around the headquarters
13
Traditional Engineering NetworkMarkets Served
Engineering Spoke Engineering Hub Engineering Node
China
Mexico/ Latin America
USA/Canada
Russia/E.Europe
Europe
India
Example Companies:
Headquarters—one or more locations in a high-cost country
Source: Booz & Company analysis
Company responseE1
The hub and spokes engineering network takes a tactical view of leveraging regional competencies
The hub and spokes engineering network takes a tactical view of leveraging regional competencies
14
Source: Booz & Company analysis
Company responseE2
Example Companies:
Traditional Engineering NetworkMarkets Served
Engineering Spoke Engineering Hub Engineering Node
China
Mexico/ Latin America
USA/Canada
Russia/E.Europe
Europe
India
Headquarters—one or more locations in a high-cost country
China
Latin America
Africa
India
Regional engineering model builds upon the hub & spokes model to create and leverage local centers to cater to localmarkets
Regional engineering model builds upon the hub & spokes model to create and leverage local centers to cater to localmarkets
15
Company responseE3
Example OEMs:
Regional Engineering NetworkMarkets Served
Engineering Spoke Engineering Hub Engineering Node
China
Mexico/ Latin America
USA/Canada
Russia/E.Europe
Europe
India
China
Mexico
Eastern Europe
India
Headquarters
Source: Booz & Company analysis
Volkswagen, Valeo, Behr, PSA, Fiat
International engineering model is constituted by local centers integrated with the mother organization but self-sufficient to cater to selected local markets
International engineering model is constituted by local centers integrated with the mother organization but self-sufficient to cater to selected local markets
16
Company responseE4
Example OEMs:
International Engineering NetworkMarkets Served
Engineering Spoke Engineering Hub Engineering Node
China
Mexico/ Latin America
USA/Canada
Russia/E.Europe
Europe
India
China
Mexico
Eastern Europe
India
Headquarters
Renault-Nissan, FordSource: Booz & Company analysis
Traditonal Engineering NetworkMarkets Served
Engineering Spoke Engineering Hub
The global integrated model has multiple self-standing centers with defined charters and serving the markets globally
The global integrated model has multiple self-standing centers with defined charters and serving the markets globally
17
(Intent) (Intent)Source: Booz & Company analysis
Company responseE5
Example Companies:
China
Mexico/ Latin America
USA/Canada
Russia/E.Europe
Europe
India
Latin America
Africa
International Center #1
International Center #2
International Center #3
What can Indian engineering services providers do
to help their clients succeed?
What can Indian engineering services providers do
to help their clients succeed?
Engineering services providers can help clients manage the downturn by increasing R&D effectiveness
Engineering services providers can help clients manage the downturn by increasing R&D effectiveness
19
Helping Clients Succeed in Today’s Economic Environment
Current ESO Initiatives
� Improving effectiveness of current ERS operations
� Offering best-in-class cost structure
� Supporting client operations globally
� Jointly investing in relationship to ensure future success
Additional ESO Initiatives
� Integrate with the client’s innovation process
� Understanding broader needs of your customers
� Help clients understand how to improve R&D effectiveness
� Foster culture of open innovation
� Work on sustainable products and technologies (and help clients identify those products)
� Variablize fixed cost for clients
� Offer new business models
� Help formulate joint go-to-market strategy
SAMPLE
ContactContact
Vikas Sehgal
Vice President
Booz & Company – India
Mobile +91 98-711-673-85
Sunil Sachan
Principal
Booz & Company – India
Mobile +91 996-326-2392 / +1 773-354-5499
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