EYInnovationA series about achieving growth

through innovation

Innovating for growthThe most innovative companies understand how to capitalize on the opportunities in their external environment.

Issues in the external environment include the major market and economic circumstances that affect business were identified through our research: technological advance, regulatory uncertainty, macroeconomic trends, ecological concerns and demographic shifts. These elements increase global exposure to risk, but they also offer major opportunities that can transform whole industries.

Internet and the cloud changed global competitionRegulation is a key driver of innovation in mature and emerging markets. In mature markets, European digitization resulted in regulatory requirements that drove demand for new broadcast equipment such as set-top boxes. Cross-border opportunities are also driven by public policy and regulation. “In North America, government incentives helped facilitate fantastic growth in the market for wind turbines,” says John O’Halloran, President of Technology at India-based Suzlon Energy, the world’s fifth-largest supplier of wind turbines.

“Our view at Suzlon is that we need to have products that are truly cost-competitive,” O’Halloran continues. “We work hard to drive down the cost of energy so that even without government incentives, it’s still the right financial decision for our customers to buy Suzlon wind turbines. And if there are government incentives, then it is even more compelling to buy from us.”

In emerging markets, product development is driven by price performance, keenly watched when regulation prompts purchases for the state. A US telecom company follows a similar strategy in China. ‘’Government subsidies are aligned to the Five-Year Plan, so we maximize use of the cloud in education because this was a key element of the technology initiatives in the Plan,” says the company’s Managing Director for Greater China.

In responding to cost sensitivity, emerging markets also have the benefit of size. “Even without applicability in other markets, the China market is big enough based on its regulatory direction, as well as consumer needs, to warrant a bespoke product design, which provides a strong enough business case to innovate solely for this market,” continues the MD of the telecom company.

Boston-Power, one of the companies that we spoke to and a leader in energy storage, capitalized on ecological concerns, regulatory incentives and customer potential in China to become an energy supplier to the automotive industry. “Being an entrepreneur, a nation seeking to be less reliant on oil meant significant opportunity for me,” says Christina Lampe-Önnerud, Founder and International Chairman. “Our insight suggested China’s policy makers had stimulated the customer base to enable a market in electric cars. They had set a policy that purchasing a car could only be done by lottery and, if successful, could only be driven half of the week. But an electric car could be purchased today with no restrictions,” Lampe-Önnerud adds, “In a sense, the government became a procuring body. An electric car is now a status symbol among high officials because it plays to the green agenda and involves state-of-the-art technology.”

Issue 1, 26 September 2012

John O’HalloranPresident of Technology,Suzlon Energy Limited,India

Case study: changing sectors – from electrics to automotive

Boston-Power had a flourishing business in supplying batteries for handheld and laptop devices, with clients such as Lenovo, ASUS and HP. When the global recession hit, the company already had mass manufacturing capabilities in Taiwan providing cost-competitive energy packets.

“As the global market crashed, we turned our attention to China,” says Christina Lampe-Önnerud. “We wanted to create a new paradigm in energy storage that solved major consumer issues with battery use. Our offering was therefore built on four promises: longer-lasting batteries, faster charging, safe usage and environmental integrity.”

Boston-Power set about creating a different energy packet, 2,000 of which would power a car. The insight that had driven the company to disrupt the market in both energy storage and car travel was spot-on. “You can have a 10-year warranty on this car. That changes the way the market thinks about energy storage,” comments Lampe-Önnerud.

Given the potential of converging opportunities, Boston-Power is focusing on long-term growth in China. “I am convinced that the Chinese market for transportation is taking off, and if you want to participate in that market, you have to focus all of your resources on that. It is still an emerging market, which is complex and presents many variables,” says Lampe-Önnerud.

Dr. Christina Lampe-ÖnnerudFounder and International ChairmanBoston Power

“A nation seeking to be less reliant on oil meant significant opportunity for me.” Christina Lampe-Önnerud

Case study: an unusual business model staves off competition

At an electric car network operator, the decision-making was very clear, as its CEO explains: “We recognized that we didn’t have the expertise to build a car, but we had to control our destiny, so we kept the IP for the machines, the software and everything else that was essential for us to build the network and outsourced the production and manufacturing to professionals. This enabled us to scale faster once we had succeeded and not be delayed by a supplier or company owning IP that could block us through an inability to achieve scale.”

Innovating the business model in this way, whereby it is the value of the IP that drives profitable growth, significantly reduced competition through replication.

“Once we got going, I thought we would have every country in the world wanting to replicate what we were doing. But people wanted to sit on the sideline and wait for us to complete what we were doing before competing with us,” says the CEO.

“The result was a technological shift so big that our company had a massive time advantage,” the CEO continues. “We have about five years of being able to run on our own, with no one else in the market remotely close to what we’ve done. And it gives us the time to solve problems from first-generation orders to next-generation orders in the meantime.”

How has this issue evolved?

The external environment today is more volatile than ever. The global economic uncertainty affects all the components, from regulation to access to capital and talent availability. This creates multiple drivers of change from different regions around the world, providing a kaleidoscope of opportunity for those able to spot their own potential in the new corporate ecosystem.

Part of this program explored strategic innovation within an organization’s core area of strength. Capitalizing on new and converging opportunities involves the use of core capabilities in a different context, sometimes shifting an organization into a different sector.

For example, when Virtual City, a system integration and mobile solutions company based in Kenya, tried to replicate Amazon and eBay in Africa, the company discovered new strengths. It had limited success with the Amazon model, but through its experience in containing air-freight costs, it had become skilled at optimizing the supply chain.

“We changed our entire company from being an internet service provider to a supply chain automation company,” says John Waibochi, CEO of Virtual City. “This is now our business thanks to a broad perspective, which enabled us to understand where our true strengths lie in relation to opportunities in the market.”

What insights can we draw?

1. Regulation determines certain opportunities to exploit and develop new markets, products or investments. Regulation also drives cross-border opportunities.

2. Companies that see the opportunities instead of threats in the external environment are more likely to succeed in having strategic innovation.

3. Internet technologies enable companies to prosper in an open, collaborative e-commerce ecosystem, which opens up a universal client base.

4. Managing changing macro-economic trends is key to planning your strategy and operations.

5. Understanding what the threats are and seeing opportunities in them, together with a flexible strategy and business model, will allow you to win in turbulent times.

Companies need to have a strategy and a business model that is flexible and adaptable enough to allow the company to manage the changing and uncertain external environment, allowing it to realign, restructure and reposition itself into new markets, products and even sectors.

Survival in the current economy and being able to achieve competitive advantage is no easy thing. With capital being hard to access, pressure on price from the consumers, competition coming from markets around the world and a war for talent that is striving to retain the best, companies need to be able to have a strategy and business model that is able to adapt and change on the go.

“The challenge with changing the business model is that piloting a new business model is very difficult,” says Ragna Bell, Strategic Market Intelligence Leader at Ernst & Young. “So business model innovation must be closely aligned to services or product innovation. Today, piloting therefore takes the form of iterative innovation of the business model — alongside iterative innovation in services and products or processes — which must evolve to support the needs of the business.”

Why is this relevant?

In today’s environment, there is a unique opportunity to gain competitive advantage for those who embrace new ways of thinking and maintain flexible business models. However, those who do not may risk falling behind.

Changes in the external environment now come from everywhere, and change is the new normal. Therefore, if they continuously monitor and address these changes, companies can seize opportunities that may not traditionally have been possible.

Business innovation can impact functions across your entire organization, creating new ways of working and the possibility for increased integration among departments. By taking advantage of changes within the external environment, companies are better placed to achieve desired business outcomes.

Our recommendations

• To stay relevant in the global market, reshape your corporate development function to manage the changing environment and capitalize on the opportunities in the environment to gain competitive advantage.

• Develop a process and strategy that allows your company to identify and build partnerships to seize these opportunities.

• Put in place a robust risk management program to monitor regulatory changes that allows you to see the threats in the environment and that is flexible enough to also identify and seize the opportunities.

• Develop a system and process to monitor diverse issues from regulatory changes across different markets including cross-border regulation, tax incentives, cost reduction, customs and other regulatory incentives.

• Embed innovation across the entire business to allow for changes in the way things are done and include performance metrics for innovation within all business units.

• Review your strategy and business model to allow your company to adapt to uncertainty and ensure it is flexible enough to change direction.

• Implement a robust change management program to promote readiness to seize arising opportunities and increase the success of execution.

Ernst & Young

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© 2012 EYGM LimitedAll Rights Reserved.

EYG no. EX0134

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

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Growing Beyond

In these challenging economic times, opportunities still exist for growth. In Growing Beyond, we’re exploring how companies can best exploit these opportunities — by expanding into new markets, finding new ways to innovate and taking new approaches to talent. You’ll gain practical insights into what you need to do to grow. Join the debate at www.ey.com/growingbeyond.

To learn more and speak with an Ernst & Young professional, please visit www.ey.com/innovatingforgrowth.