Presentation

Perspectives on InnovationASME IAB Meeting

October 4, 2006

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Innovation is the fundamental driver of growth and profitability

Competitiveness will continue to be based on a company's ability to innovate -There is no more important capability a company can develop to improve performance and to fuel growth …

… sustained growth and profitability cannot be achieved through cost cutting alone

Truly standout innovators have developed capabilities to consistently target superior new products and bring them to market with speed and efficiency

The challenge is to select, build, and deploy this differentiating set of innovation capabilities

Yet, senior executives are often uncertain of the answers to key questions about their innovation strategy and capabilities

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Senior executives recognize the importance of innovation to their objectives

65%

27%

6%

2%

0%

0% 20% 40% 60% 80%

Importance Of Innovation To Strategic Objectives

Percentage of Respondents

Self-Assessed Strength Of Own Versus Competitor Capabilities

Critical

Relatively Unimportant

Somewhat Advantaged

Versus Competitors

40%

A Source Of Significant

Competitive Advantage

20%

About On Par With Competitors

20%

Somewhat Disadvantaged

Versus Competitors

20%

Significantly Disadvantaged Versus Competitors 0%

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In aggregate, companies’ top innovation priorities are on product leadership

Increase Partnering (Suppliers / Others)

Increase Use Of Product Platforms

Improve Product Quality (Defects)

Increase Engineering Efficiency

Improve Product Quality (Customer Value)

Develop Products Faster

Establish / Maintain Technology Leadership

Reduce Product Cost

Introduce More New Products

Relative Importance of Innovation Objectives

CriticalRelatively Unimportant

Inc

reas

ing

Im

po

rta

nce

- 5

The performance bar is being set very high

0% 10% 20% 30%

Improved Quality(Customer Value)

Improved Quality(Defects/Cost)

Reduced Time To Market

Reduced DevelopmentCost

Reduced Product Cost

Percentage Improvement

Target Performance Improvement(Average Horizon Is 2.2 Years)

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However, executives are only marginally satisfied with current improvement initiatives

Introduce More New Products

Reduce Product Cost

Establish / Maintain Technology Leadership

Develop Products Faster

Improve Product Quality (Customer Value)

Increase Engineering Efficiency

Improve Product Quality (Defects)

Increase Use Of Product Platforms

Increase Partnering (Suppliers / Others)

Level of Satisfaction

Satisfaction With Current Innovation Initiatives

Highly Dissatisfied

Highly Satisfied

Inc

reas

ing

Im

po

rta

nce

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Spending more money on R&D is not the answer …

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0 1 2 3 4 5 6 7

Indexed R&D-to-Sales Ratio

Sales Growth %

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0 1 2 3 4 5 6 7

Indexed R&D-to-Sales Ratio

Sales Growth %

Top Global R&D Investors Correlation Between Return and R&D Spend

Analyses found no correlation between R&D spending and:

• Sales growth• Profitability growth• Gross profit• Operating profit• Net profit• Market cap growth• Total shareholder return

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Superior performance is linked to superior capabilities in innovation value stream activities

KeyCapabilityQuestions

• How to grow/defend existing markets and customers?

• How to extend into new markets?

• How to Leverage market/technology disruptions?

• How to create differentiation and avoid “me too” products?

• How to identify unmet/ emerging customer trends/ needs?

• How to balance variety and complexity?

• How to maximize ROInnovation – first to market with best ideas

• How to maintain focus and alignment with strategy?

• How to avoid high WIP and low throughput?

• How to the market window to maximize economic value

• How to rapidly respond to competitor moves or market shifts?

• How to deliver products & services on-time, at target cost and performance with high initial quality?

Identify New Markets and Growth PlatformsIdentify New Markets and Growth Platforms

Generate Ideas for Differentiated

Products & Services

Generate Ideas for Differentiated

Products & Services

Prioritize Opportunities to Maximize Return

Prioritize Opportunities to Maximize Return

Fast and Effective Development &

Commercialization

Fast and Effective Development &

Commercialization

INNOVATION VALUE STREAM

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Some Useful Guidelines for Effective Innovation Metrics

MeaningfulMeaningful

Balanced Across Multiple Dimensions

Balanced Across Multiple Dimensions

Accurate and RepeatableAccurate and Repeatable

Partially Suited for Benchmarking

Partially Suited for Benchmarking

Few in NumberFew in Number

Metrics should be tied to the overall business objectives and lead managers to clear actions based on their results

Metrics should able to be consistently and repeatably collected with existing systems

“Benchmark-able” for internal and external comparisons

Focus on the most critical few metrics – data availability often leads to metrics overload

Balanced by level (strategic vs executional, leading vs. lagging, current vs historical)

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Frequently Used Measures – all have their limitations

Source: APQC Benchamarks

MOST FREQUENTLY USED INNOVATION METRICS

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Example Balanced Scorecard

R&D as % of Sales

Patent Filings

# of areas with Tech. Leadership

Leading Outcomes

Str

ate

gic

Po

rtfo

lio

Ex

ec

uti

on

al

Profits from new products/New Product R&D

Cost reduction/CR R&D spend

Value creation/R&D spend

Portfolio balance (balance vs risk, etc.)

Portfolio alignment (investment vs strategic objectives)

% of Gate Criteria Completed

% Open Requirements In-Process Sched. &

Budget SLIP Staffing %

Time-to-market Customer Satisfaction Warranty/quality

Claims

EXAMPLE INNOVATION SCORECARD

Measures tailored to objectives: e.g. growth/share in targeted markets, geographies, etc.

Overall measures of R&D effectiveness at creating value“What’s the return on our innovation investment?”

Alignment of development projects and spending with company strategic objectives“Are we working on the right things?”

Performance of project execution in terms of time, cost, quality and value“Are we delivering products/services on time at a quality and cost customers will pay for?

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Our service offering helps clients improve performance all along the Innovation Value Stream

GG Innovation

ServiceOffering:

Identify New Markets and Growth PlatformsIdentify New Markets and Growth Platforms

Generate Ideas for Differentiated

Products & Services

Generate Ideas for Differentiated

Products & Services

Prioritize Opportunities to Maximize Return

Prioritize Opportunities to Maximize Return

Fast and Effective Development &

Commercialization

Fast and Effective Development &

Commercialization

INNOVATION STRATEGYINNOVATION STRATEGY

PROFITABLE INNOVATIONPROFITABLE INNOVATION

FAST INNOVATIONFAST INNOVATION

INNOVATION VALUE STREAM

Unique, Market-Based Approach to Identifying Growth Opportunities

Proprietary Methods for Optimizing Portfolio Value and Business Complexity

Proven Tools to Maximize Development Performance

Build and Embed New

Client Capabilities

Collaborative Working

Relationship

Combine Strategy with

Implementation

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About George Group

Since 1986, George Group has been accelerating the pace of improvement for a diverse and growing list of global clients. Our goal is to help our clients create rapid and sustained improvements in shareholder value and customer satisfaction.

Fully integrated Lean Six Sigma corporate deployment Our deep Value Based Management knowledge provides us with a clear framework to connect

from the CEO's highest value creation priorities to Lean Six Sigma project selection, definition, and execution. No other firm provides this combination.

Our global reach is unmatched. We have established a reputation for excellence in complex, global engagements providing services in 54 countries and a methodology available in 13 languages.

Strategic consulting Our engagement teams bring deep expertise in assessing customer needs and value creation of

the product/service portfolio. Our project teams are not composed of new consultants, but seasoned, experienced experts who understand both the strategic and operational side of the solution.

Conquering Complexity: Our unique approach is the only true method that provides a quantitative understanding of what complexity is costing your organization and rapidly drive execution that gets results. Our complexity diagnostic brings together the critical elements of strategy, shareholder value, voice of customer, deep process knowledge and a patented analytical method to provide a completely unique, fresh point of view on the problem.

Fast Innovation: We offer a systematic, analytical, repeatable approach to: accelerating cycle-time to-launch and improving quality & market acceptance, building a robust pipeline of truly differentiated products/services, and creating deep & enduring capability in client organizations. Our process oriented view covers the entire new product/service value chain from early business development through full scale production.