The Organic Growth Challenge Organic growth tops the

The Organic Growth Challenge Organic growth tops the CEO’s agenda in 4 of 5 public companiesᵅ Yet…. • 94% of global executives were dissatisfied with their organizations’ innovation performance. ᵅ • Only 31% of senior managers are reasonably confident they can reach their organic growth targets…ᵅ Topics 1. Lessons from growth leaders: Focus on 4 innovation levers 2. Align innovation metrics and incentives: Avoid the measurement traps ᵅMc. Kinsey (2016): Large cap firms 1

Lessons From Growth Leaders: Point Solutions? Hold an innovation tournament Hatch inhouse start-ups Apply design thinking Build an innovation dashboard Set up a corporate VC group Implement rapid prototyping Co-create with customers Embrace open innovation Find a “Blue Ocean” Become Ambidextrous Understand Customer jobs Apply lean thinking methods 2

Lessons From Growth Leaders: Apply Innovation Levers 1. Invest in Innovation Talent • Demonstrate leadership commitment 2. Encourage Prudent Risk-Taking • Signal the culture is risk embracing 3. Adopt an Outside-in Approach • See opportunities sooner 4. Align metrics and incentives • Avoid the measurement traps 3

Identifying the Most Effective Innovation Levers* Step One: Step Two: Generated 18 hypotheses about improving innovation performance = possible innovation levers Surveyed 192 Senior Innovation executives from diverse global companies Step Three: Tested the effect of each hypothesized lever on relative organic growth performance Step Four: Identified the 4 innovation levers that best explained differences in relative organic growth performance. _______ __ *Funded by the Mack Institute for Innovation Management, The Wharton School 4

Profiling Growth Leaders* 1 Developing innovation talent is not a priority Our culture is highly riskaverse and does not cope well with failure We are poor at listening to customers and anticipating their needs Our incentives are not linked to innovation performance 2 3 4 5 6 7 We invest heavily to develop and retain our talent in innovation activities Our culture encourages risktaking and learning from disappointments Every senior manager is attuned to the voice of the customer Rewards and recognition are strongly linked 5

Profiling Growth Leaders* 1 Developing innovation talent is not a priority Our culture is highly riskaverse and does not cope well with failure We are poor at listening to customers and anticipating their needs Our incentives are not linked to innovation performance 2 3 2. 6 5 3. 9 6 7 We invest heavily to develop and retain our talent in innovation activities Our culture encourages risktaking and learning from disappointments Every senior manager is attuned to the voice of the customer Rewards and recognition are strongly linked 5. 0 3. 6 4. 3 2. 2 3. 2 2. 7 = Growth laggards 4 4. 4 5. 1 3. 94. 4 = Average performers = Growth leaders *Differences between means are significant>. 01 (2 tailed test) 6

Lessons from Growth Leaders: (1) Invest in Innovation Talent “No organization can do better than the people it has” Peter Drucker Show • Leadership signals that finding, developing Commitme and keeping innovation talent is the highest nt priority. Support • Invest in developing the competences of innovation leaders • Communicate the growth strategy throughout the organization* • Stay involved in project reviews *Only 16% of managers say their firm has a clear growth strategy (Top 2 boxes) 7

Lessons from Growth Leaders: (2) Encourage Prudent Risk-Taking Encourage risk-taking • Signal the culture is risk embracing; treat disappointments as learning opportunities • Conduct post mortems to diagnose causes and share the lessons Contain innovation risk with small, staged bets • Make experimentation a discipline: encourage fast, frugal experiments • Buy real options: invest a little to learn a lot 8

Lessons from Growth Leaders: (3) Adopt an Outside-In Approach Immerse the leadership team in early market signals of threats and opportunities • Ensure every senior manager is attuned to the voice of the customer • Start the strategy dialogue from the outside in • Scan for weak signals of threats and opportunities • Begin leadership meetings by discussing anomalies • Network widely in unconventional places 9

Lessons from Growth Leaders: (4) Align metrics and incentives while avoiding the measurement traps Trap One Misleading signals from the innovation dashboard • Too many metrics = confusion • Too few metrics = vulnerable to confounding effects of luck and lag 10

Possible Metrics in an Innovation Dashboard Inputs Process effectiveness Performance outcomes 1. R&D spending (percent of sales) 1. Development activities 1. Percent of sales from new products in past N years 2. Human resources devoted to innovation 3. Pipeline of ideas/concepts 4. Number of R&D projects in active development 5. Percent of ideas/concepts from outside the firm 6. Ratio of ideas from inside/outside — Percent hitting gates on time — Percent meeting quality — Guidelines 2. Patenting activity — Number filed — Number commercialized — Percent covered by patents 3. Budget vs. actual — Time — Cost/investment 4. Average time to market — Number of new products launched 5. Percent of projects that are major improvements 2. Success ratio (percentage of meeting financial goals) 3. Revenue growth 4. Return on investment in innovation (ROIC) 5. Percent of profits from new customers (or occasions) 6. Percent of profits from new categories 7. Average time to breakevent/cash 8. Customer satisfaction 9. Profit growth due to new products/services 10. Percent of profits from new products in a given period 11. NPV of portfolio 12. Potential of portfolio to meet 11 growth targets

Dilbert & United Feature Syndicate, Inc. 12

Popular Innovation Metrics Inputs Process effectiveness Performance outcomes • Pipeline of ideas/concept (61%) • Number of new products launched (46%) • Revenue growth (60%) • Customer satisfaction (48%) • Return on investment in innovation (48%) • Profit growth (45%) • Percent of sales from new product in past N years (44%) *Only metrics used by at least 40% of sample are shown Source: Mc. Kinsey & Co. and Wharton Mack Institute survey on innovation metrics, conducted October 2008 – 1202 respondents 13

Lessons from Growth Leaders: (4) Align metrics and incentives while avoiding the measurement traps Trap One: Misleading signals from the innovation dashboard • Too many metrics = confusion • Too many metrics = vulnerable to confounding effects of luck and lag Trap Two: Using what is available vs what is needed • Overemphasis on outputs Trap Three: Encouraging the wrong behaviors • Rewarding individuals vs teams • Surrogation = maximize the score rather than what matters (Percent of sales from new products in past 3 years) 14