Corporate innovation for established companies

  This article discusses the importance of innovation to achieve long-term growth, the mindset and culture required to drive innovation, the considerations to form actionable ideas aligned to innovation strategy, the process of managing innovation and the approaches to cultivate innovation.

Utilize innovation as a critical lever to achieve long-term growth

At a time when the pace of innovation is dramatically compressing cycle times, not preparing for the future creates business risk. While it is tempting for businesses to weather the uncertainty either by taking a “wait-and-see” approach or a defensive cost cutting approach, we believe that companies need to focus on both top line and bottom line growth.  Focusing only on cost cutting will tend to impede top-line growth since companies will not be positioned to take advantage after the crisis ends. This aligns with the 2019 study conducted by Gartner on the fortune 1,000 companies. The survey observed that companies that focused on both top-line and bottom-line growth during the 2008 recession emerged as top of their industries in terms of revenue, margin improvement and long-term growth. According to its survey, outperformers posted a 13% annualized growth rate in earnings before interest, tax, depreciation and amortization (EBITDA) between 2009-2017, compared to a 1% annualized contraction in EBITDA among the control group.

 

 

 

Inculcate an explorer mindset – Encourage risk taking and accept failures

Traditional corporate culture of rewarding success and inaction while punishing failure is an obstacle for innovation. As the process of innovation requires exploration and taking risks, companies must rewire their culture and norms to tolerate and value risk. Innovative organizations have embraced an explorer’s mindset, marked by a constant search for new ideas and a passion to solve fundamental problems for the company’s customers and employees. Companies can empower employees by providing them with channels and resources for them to pursue innovative ideas independently. Adobe’s Kickbox program has successfully provided a toolkit to encourage and guide employees to contribute ideas, and has since become an open-source material used by other organizations. Commitment and direct involvement from top management is also crucial to inculcate an innovative culture. While there might be a trade-off between short-term performance and investment in innovation, top management needs to create a clear vision and strategy for innovation with communication and allocation of sufficient resources. Innovation can be broadly classified as sustaining innovation to improve current products within existing businesses and disruptive innovation to discover new products and markets. It is hard for disruptive innovation to happen within most established companies as incentives for business units are aligned to the existing businesses. As such, new business units with new business models are needed for disruptive innovation. External avenues to innovation that are kept separate would be viable as well.

Work on actionable ideas aligned to your strategy that can be monetized

Though it is often tempting for companies to measure innovation by R&D spending in absolute terms or as a percentage of total revenue, studies have shown that there is little correlation between both of them. While R&D spending is an indication of commitment to grow, R&D typically focuses on technical aspects which might not coincide with the needs of customers. Innovation should have needs of customers — either existing or future — in mind. Innovative companies often have clear innovation strategies that typically have a society and customer-centric focus. Amazon has adopted a data-driven and customer-focused innovation approach, using artificial intelligence to understand customer behavior in order to predict what they might want next. Typical questions that help companies to choose focus areas include:
  • What are the key challenges of the future? Do customers have needs that they want to be solved?
  • In which areas does the company hold the greatest pockets of knowledge, competence, and resources, and how can they be leveraged?
  • Which market segments should the company target?
  • How do customers define value, and what are the key considerations by which we can create a compelling value proposition for them?
  • What data should the company generate during development to prove the value proposition?
  • Can we make money from the value proposition?
  • Is the value proposition aligned with our strategy?
  • What revenue and profit targets need to be achieved?
  • What resources are available for reinvestment?
While there will always be a strong element of risk in innovation, the process of managing innovation should never be haphazard or risky. A holistic and data-driven approach to prioritizing innovation investments can increase R&D efficiency and greatly reduce the risks of research bottlenecks and wasted R&D resources.

Develop a formal process for managing the innovation process

Poor management of innovation processes in the organization can have huge long-term economic and strategic implications. A poor process could result in under-utilized capabilities, focusing on unrealizable projects, lack of vision on desirable outcomes, misallocation of resource and no results. Companies that aptly manage their innovation efforts stand to gain an edge over their competitors. Innovative cultures require guiding structure of governance and process to be effective. As innovation requires starting with numerous ideas before narrowing them, it is important to know when to stop investing in faltering ideas or projects. There should be stringent capital controls, resource allocation mechanisms and clear processes in place to guide projects or kill them.

Explore internal and external avenues to innovation

Innovation approaches should complement each other; hence companies should deliberately construct and operate their portfolio of approaches. In addition to openness to ideas created in-house and from internal R&D departments, companies must be open to sources of new ideas through engagement with a broader external ecosystem. Experienced innovators employ a variety of approaches to generate innovation. The portfolio of external approaches include corporate venture capital, business accelerators, incubators, acquisitions and partnerships with the broader ecosystem. Knowing where you are today helps you set the course and prioritize what needs to happen next. It also helps you to strategize your move – either succeed as a disruptive innovator or defend against a disruptive challenger. The following questions are useful to determine which approach best suits your needs:
  • How much resources (time, money, human resources) can you allocate internally and externally?
  • Do you want to focus on growth of your existing businesses or discover disruptive ideas and new businesses?
  • Do you employ enough approaches to constitute a diverse portfolio? Are those approaches aligned with clear objectives?
Highly innovative companies collaborate with an ecosystem of external organizations to tap into specialized expertise and broader talent pools, to build tools and solutions without bearing the full cost and to gain exposure to new ideas and business models.

How can IGPI help you in your innovation journey?

Established companies should encourage innovation by fostering a risk taking organizational that is in line with a clear strategy for innovation focused on customer needs. Companies need to understand that innovation is a journey and there is a need to review their portfolio approach from time to time to make sure they are focusing on the right opportunities that aligned with the changing needs of the business. For that reason, businesses must engage with strategy consulting firms to make strategic business decisions. Based in Singapore, IGPI has the end-to-end capabilities in supporting your innovation journey. As a management consulting firm, we can help you by both looking inside and outside to identify best opportunities that align with your strategy and core capabilities. Here is a representative list of our capabilities to serve your innovation needs:
  • Internal change management to shape an innovative culture through empowering employees
  • Discover new growth areas by exploring adjacencies where your organization has opportunities and capabilities to win
  • Identify disruptions and emerging trends that your business should be aware of and embrace
  • Identifying the areas where your competition are placing bets and which emerging players are most interesting or threatening
  • Review, align and restructure innovation initiatives to identify loss-making initiatives and focus on the key issues
  • Identify the critical capabilities required and define the best path to obtain them whether through corporate venturing, partnership, acquisition, or internal development
  • Support for acquisitions, running an accelerator program, identification of partners

Case study:

IGPI developed the concept of ideathon and developed a business model from the ideas shortlisted from the ideathon

Our client, a global fortune 500 conglomerate, wanted to enter a new space in the technology-driven health and wellness sector in Southeast Asia

 

 

1. How to source for ideas?2. How to define the business model?3. Who should they partner?
 

 

IGPI’s involvement
  • Studied the client’s choice of market
  • Identified talent pools for idea generation Identified talent pools for idea generation
  • Developed marketing and execution plan for the client
  • Conducted market research on the feasibility of the idea
  • Developed business model that includes Go-to-market strategy and monetization strategy
  • Created list of potential targets for collaboration
  • Contacted targets for collaboration
  • Recommended partners that offer complementary strengths to client’s business
Outcome
  • Ideathon has been conducted in a leading university in the client’s market of choice
  • Several ideas have been submitted by the participants
  • Recommended client to work with partners within the ecosystem and separated the new team from current organization
  • Partnered with MNCs, Startups, and data providing agencies to develop AI based proof of concept
 

Key takeaways:

  1. Time to market is key to gain expertise in the new segment. Convinced the conglomerate to partner with ecosystem players because it gives them first mover advantage to bring innovative solutions to market
  2. Local knowledge is essential for new business development. IGPI’s local knowledge helped in developing market intelligence in the market. IGPI was able to conduct market research and collaborated with startups and other ecosystem players in local language
  3. Pilot partners are necessary to test the viability of the idea. We were successful in identifying the requirements of the partners to run the pilot program

About the Authors

Chong Han is a Senior Manager at IGPI Singapore. Chong Han’s career started in 2008 in the M&A advisory arm of a global professional services firm, with a focus on valuation advisory relating to mergers and acquisitions, restructuring, financial reporting and litigation support. Thereafter, he joined a SGX-listed regional real estate player, investing in lands for development and properties for redevelopment or holding. His experiences and skills span across a wide spectrum of investment activities such as market analysis, due diligence, valuation, and financial modelling and transaction execution. Divya is an Associate at IGPI Singapore. She started her career with Tech Mahindra (then Satyam Computer Services Limited), a leading Indian IT services provider in their technology advisory services team. Later she worked with leading companies in Singapore – Prudential, AIA and Tetra Pak in their IT departments. In a career spanning 15 years in various industries, she has participated in several digital transformation and innovation initiatives in various roles. After attaining her MBA from National University of Singapore, she joined IGPI where she works on strategy projects.  

About IGPI Singapore

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around funds supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support and consulting towards commercialization and monetization of technologies IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. Our firm acts as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan with consulting services and support. We also provided sell side advisory for SMEs and private equity fund looking to divest. Get in touch with us on innovation, portfolio planning and M&A related topics! IGPI Singapore – contacts:
Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp
Kim-Lân Dang Senior Manager +65 91000273 k.dang@igpi.co.jp
Chong Han Lim Senior Manager +65 90692611 c.lim@igpi.co.jp
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Rise of Japan’s Outbound M&A Activity

Japan’s outbound M&A activity has risen sharply over the past years, driven by demographic and economic shifts, encouraging government initiatives and low funding cost. As a shrinking population and lackluster domestic economic growth limit internal expansion potential, Japanese corporations are increasingly looking overseas for growth opportunities. Beyond that of tapping on existing capabilities to create new markets overseas, Japanese corporations can also acquire new products and technologies through cross-border M&A. Prime Minister Shinzo Abe’s pro-global business policy has encouraged both inbound and outbound investment. Government organizations such as Japan External Trade Organization, Development Bank of Japan and Japan Bank for International Cooperation are instrumental in fostering a conducive environment for strategic overseas investments. This has brought about a mindset change of Japanese corporations to venture globally. With a loose monetary policy aimed at stimulating economic growth, Japan’s low to negative interest rate encourages Japanese corporations to invest at a low funding cost. Coupled with cash reserve from operations and internal resources, Japanese companies are able to compete on price for attractive targets with their lower hurdle rate.

The Fundamentals of Overseas Expansion

Before any M&A activity, a corporation (Japanese or not) needs to first map its growth strategy. Once M&A has been identified as part of the growth strategy, a deal framework spanning the entire M&A spectrum should be established. A strategic road map enables a corporation to plan and set action plans to achieve goals that are aligned to the vision. Top executives need to communicate a clear vision of the corporation to employees. Employees should be empowered to achieve stated goals and objectives with actionable strategies and plans. For instance, a corporation with a vision to be the leading technology firm globally could have goals of highest market share, driven by plans to hire top-notched employees and acquire leading technology firms globally. Cross-border M&A requires careful planning and expertise to achieve the desired effect. Firstly, the strategic rationale for acquisition should be clear – whether it is for expansion of the core business in a new market, foraying into an adjacent business, or other purposes. Secondly, suitable potential targets that fit the strategic rationale should be identified. Local advisors with local networks and market knowledge are helpful in searching for such targets. Corporations should also identify sources of synergies with the targets and quantify them at this stage. Thirdly, structuring, due diligence and valuation should take place after a certainty of interest has been mutually established. Structuring should consider tax impact (corporate tax, capital gains tax, withholding etc.), regulatory regime and ease of profit repatriation. Common areas of due diligence include financial, tax and legal. Investors should also consider foreign direct investment restrictions that vary by countries and sectors and plan accordingly. Valuation helps form the basis for price negotiation, and aids in synergy quantification (if any). Fourthly, post-merger integration should be planned and executed to achieve the intended effects. It is a folly to think that synergies will realize itself without concise effort. Planning for post-merger integration should start from the beginning of the deal, and include areas such as revised organization structure, reporting line, roles of employee, IT system integration. An in-house steering committee coupled with external change management experts will be helpful. Finally yet importantly, M&A is a reiterative learning process that is honed through ongoing review of performance. Corporations that actively seeks growth through M&A should ideally have a dedicated M&A team that shares knowledge, and periodically compares the intended and actual outcome. It might make sense to exit from the investment at times.

ASEAN as An Investment Destination

Association of Southeast Asia Nations (“ASEAN”) is an emerging region made up of 10 distinct countries, with immense business potential from its booming population of over 650 million. With a combined gross domestic product of US$3.0 trillion in 2018, it is the third largest economy in Asia (behind China and Japan). ASEAN received US$1.5 trillion of foreign direct investment in 2018, topped by Singapore (50%), Indonesia (14%) and Vietnam (10%). Vietnam has been gaining positive attention in recent years in light of the US-China tension, supportive government that is opening the borders and making doing business easier, fast growing and stable economy that created a rising middle-class population and a large population of over 97 million where 70% is under 35 years of age. IGPI has a Hanoi office that works closely with the local government on restructuring of state-owned enterprises. With a geographical proximity to Japan, ASEAN is a popular investment destination for Japanese corporations. Especially for small and medium-sized deals (IGPI defines as less than US$500 million in enterprise value), ASEAN might be more popular than conventional investment destinations such as United States of America, Europe and China. ASEAN has a wide range of opportunities such as being a low cost manufacturing base, housing a rising middle class population that represents a huge consumer market, and booming industries in infrastructure, digital economies, renewable energy, healthcare, education and others. Coupled with its open policy on international trade and dealings, it is little wonder that ASEAN has been gaining traction as an investment destination.

Challenges of Japanese outbound M&A

While Japanese corporations are renowned for their professionalism and knowledge, there are still challenges observed in cross-border M&A activities in ASEAN. Challenges observed are (1) lack of appreciation for the ASEAN’s diverse business-operating environment, (2) extensive information and reporting requirement, and (3) hierarchical structure with multiple layers of mid-management. Lack of appreciation for ASEAN’s diverse business-operating environment ASEAN is a diverse region with different languages and cultural backdrops, requiring sensitivity in the M&A process as well as post-merger integration. Maneuvering such differences require awareness and sensitivity, and a local advisor might be able to bridge the gap. For instance, certain ASEAN regions are straightforward and upfront with their opinions, while some Japanese might be reserved and indirect in their conversation. It is also common for CEO and/or founder of small-medium enterprises in ASEAN to attend meetings where decisions can be made, while mid-management of Japanese corporations who might not have decision making authority might attend such meetings. Extensive information and reporting requirement As information, documentation and processes in ASEAN’s small-medium enterprises might not be as complete as Japanese corporations, due diligence might be a painful process for both parties. The target might have trouble gathering and preparing the due diligence request of the acquirer. Layers of approval required in some Japanese corporations also implies negotiation is a long drawn process, causing frustration and sometimes resulting in a no-deal. If the deal successfully closes, such reporting and governance structure might be difficult for local companies to adopt. Hierarchical structure with multiple layers of mid-management Big Japanese corporations typically have layers of hierarchy that might not be transparent to outsiders. Mid-management (such as in regional headquarters) might not have sufficient authority to make decisions, which might cause a longer process with confusion along the way. As the key performance indicator of the mid-management might not be aligned to the corporation, M&A might not be evaluated appropriately. For instance, measurement by number 4 of M&A activities might cause over-paying for the deal, while measurement by return on investment might lead to over-cautious evaluation and missing the deal. Targets (and acquired companies) might feel frustrated that the decision-makers do not hear what is said, and communication is merely a top-down approach. Communication is a two-way street that can prevent unhappiness arising from differences. Begin with an understanding and appreciation of the differences, and communicate frequently to address feelings of parties. For instance, due diligence requirement and timeline can be communicated upfront so that the acquirer can prepare the target for the requirement, and the target can manage the expectation of the acquirer on the availability of such information. Skepticism of the acquired local companies on perceptions such as glass ceiling of foreign employees in a Japanese corporation and rigid working culture can be allayed through communication. Differences in another perspective, is a good way to grow as parties learn the positives from each other and create a mutually beneficial arrangement. The world is your oyster (or sashimi) Despite the divides that seem to be surfacing in today’s world, IGPI Singapore believes that the world will benefit with cross-border flow of information, people and capital. Being a firm that provides deal support from strategic planning to execution to post-merger integration, IGPI adds value through our local network and market knowledge. Corporations no longer look at just the domestic market in this interconnected world. Opportunities are yours to identify and pick, competitions are yours to navigate and overcome – are you ready for it? Case study: IGPI’s overseas expansion support from strategic planning to M&A advisory

Japanese client in the steel manufacturing industry known for their technology and innovation wishes to expand beyond the domestic market into Southeast Asia

 
 
Which Southeast Asian market to enter?What is the mode of entry?Who should they partner?
 
IGPI’s involvementPerformed analysis of 6 key markets in terms of market size and potential, government regulations and support, business operating environment etcAnalyzed options such as entering organically, joint venture, partnership, acquisition and discussed with client on pros and consCreated list of potential targets for collaboration and contacted targets for discussion before conducting due diligence
OutcomeClient decided on Thailand as key market to enter based on holistic considerationAcquisition was selected as the mode of entry for speed of accessSelected target that had broad network to cross-sell client’s products and due diligence was done with information constraint of target
 

Key takeaways:

There needs to be clear strategy for growth. The Japanese company understood its core strength was its products and sought targets who had distribution channels and customer access to complement them.

Top management needs to be committed and involved. IGPI was able to work directly with the top executives that could make prompt well-informed decisions.

Local knowledge is important for overseas expansion. Local knowledge helped to build rapport with potential targets and facilitated due diligence as our team needed to work around information constraint.

About IGPI Singapore Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a USD 100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. JBIC IG provides counsel to Russia-Japan Investment Fund, which has a USD 1 billion joint investment framework with Russia’s sovereign wealth fund. In 2019, JBIC also jointly established a EUR 100 million venture capital fund with BaltCap, focusing on deep tech sectors in the Nordic and Baltic region. IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sellside advisor for SMEs and private equity fund looking to divest. Get in touch with us on strategic planning and M&A related topics!
Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp
Kim-Lân Dang Senior Manager +65 91000273 k.dang@igpi.co.jp
Chong Han Lim Senior Manager +65 90692611 c.lim@igpi.co.jp
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.