DISRUPTIVE INNOVATIONS V - Citi
DISRUPTIVE INNOVATIONS VTen More Things to Stop and Think AboutCiti GPS: Global Perspectives & SolutionsNovember 2017Citi is one of the world’s largest financial institutions, operating in all major established and emerging markets. Across these world markets, our employees conductan ongoing multi-disciplinary conversation – accessing information, analyzing data, developing insights, and formulating advice. As our premier thought leadershipproduct, Citi GPS is designed to help our readers navigate the global economy’s most demanding challenges and to anticipate future themes and trends in a fast-changing andinterconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionalsacross our firm. This is not a research report and does not constitute advice on investments or a solicitations to buy or sell any financial instruments.For more information on Citi GPS, please visit our website at www.citi.com/citigps.
Citi GPS: Global Perspectives & SolutionsNovember 2017Daniel AriasRobert BucklandU.S. Life Science Tools & Diagnostics Analyst 1 (212) 816-4069 daniel.arias@citi.comChief Global Equity Strategist 44 (20) 7986-3947 robert.buckland@citi.comNathan FurrWilliam R KatzAssistant Professor of Strategy, INSEADU.S. Asset Manager & Broker Dealer Analyst 1 (212) 816-5394 william.katz@citi.comAdriana Knatchbull-HugessenGraeme McDonaldCommodities Research Analyst 1 (212) 723-7193 adriana.knatchbullhugessen@citi.comJapanese Maufacturing & Shipbuilding Analyst 81 (3) 6776-4614 graeme.mcdonald@citi.comPraful MehtaEdward L MorseU.S. Power, Utiltiies & Renewables Analyst 1 (212) 816-5431 mehta.praful@citi.comHead of Global Commodities Research 1 (212) 723-3871 ed.morse@citi.comYigal Nochomovitz, Ph.D.Walter H Pritchard, CFAU.S. SMID Biotech Analyst 1-212-816-1441 yigal.nochomovitz@citi.comU.S. Software Analyst 1 (415) 951-1770 walter.h.pritchard@citi.comAshwin Shirvaikar, CFAAdam SpielmanHead of U.S. Payments, Processors & IT ServicesResearch 1-212-816-0822 ashwin.shirvaikar@citi.comHead of European Consumer Staples Research 44-20-7986-4211 adam.spielman@citi.comHaley A Tam, CFAStephen TrentHead of European Diversified Financial Research 44-20-7986-4220 haley.tam@citi.comLatin American Transportation Analyst 1-212-816-6901 stephen.trent@citi.comChristian WetherbeeMartin WilkieU.S. Airfreight, Surface & Marine TransportAnalyst 1-212-816-9051 christian.wetherbee@citi.comHead of European Capital Goods Research 44-207-986-4077 martin.wilkie@citi.comAnthony Yuen, Ph.D.Global Energy Strategist 1-212-723-1477 anthony.yuen@citi.com
November 2017Citi GPS: Global Perspectives & SolutionsDISRUPTIVE INNOVATIONS VTen More Things to Stop and Think AboutKathleen Boyle, CFAGlobal Head & Editor of Citi GPSAs we worked this summer to start putting together our fifth edition in the Citi GPSDisruptive Innovations series, there was a concern that the entries we werereceiving didn’t have that “wow” factor that we felt in prior years. So we re-thoughtand cast our net wider, and put a new slate together. But for some reason, we stillcouldn’t muster up a load of excitement. Mildly dejected, we started to speak topeople outside of our circle and that’s when we had an ‘aha!’ moment and realizedthat over the years we had immersed ourselves in so many publications andwebsites that much like ‘innovation junkies’, it was taking more and more for us toget excited about things that could be disruptive and change the future. Looking atour list with new eyes — more like the ones we had when we started this series fiveyears ago — we now have here what we think is thought-provoking and fantastic.Imagine going to the doctor and having a routine blood test that can scan your bodyfor cancer tumors. Or being told that your child was born with a genetic disease butthen finding out it can be ‘cured’ by injecting a virus which can edit the defectivegene. Both of those things are possible in the near future with the advent of liquidbiopsy techniques and CRISPR-based gene editing.In transportation, robotic piloting in commercial jets could mean that your flight isunmanned and that the days of your plane being delayed because the pilot is stuckin traffic on the way to the airport are long gone. Or maybe you don’t want to takethat short-haul flight at all, and instead could jump into a Hyperloop pod that shootsyou 700mph in a vacuum tube to your destination. Artificial intelligence-pilotedplanes and Hyperloop systems could be the driver of new transportation modes.In financials, it seems like there are new breakthroughs in FinTech almost everyday. The same is true for Internet of Things (IoT) where a positive environment isemerging as the number of connected devices is increasing and high-speedbandwidth is being widely deployed. We look at how adding a payments layer toany IoT construct helps the proliferation and monetization of IoT use cases.Blockchain — primarily known as the basis for cryptocurrency — could soon beused to change how we trade physical commodities, but also how our localelectricity market operates. And in an attempt to take back share from passivemanagers, active investment managers are disrupting their pricing models byconsidering a performance-oriented fee structure.Robots designed to replace humans through the automation of factory floors hasbeen a trend for a few years, but new developments in end-of-arm tools for robotswhich aim to mimic the function of the human hand could mean that we will seerobots performing a new range of jobs and functions. On the flip side, new low-codedevelopment platforms are coming that will facilitate the rise of the “citizendeveloper” who can create software applications for the business world without theneed of a traditional software developer and thereby bridge the gap between thesupply of developers and the demand for application development. Finally, we lookat the next generation of tobacco — Heat Not Burn tobacco — which gives the userthe enjoyment of a traditional cigarette without the smell and harmful smoke.And we start it all off with a look at what big companies can do to transformthemselves into innovators. We hope you find these ‘Ten More Things to Stop andThink About’ as exciting as we do. 2017 Citigroup3
A Galaxy of OpportunitiesHeat Not Burn TobaccoSmart Robotic ToolsHeat Not Burn products providethe taste of tobacco without thesmell and harmful smokeEnd-of-arm tools that mimichuman hand capabilities couldchange how robots are usedUnmanned Commercial AircraftThe deployment of robot pilotson commercial flights couldimprove the safety record,profitability and efficiency ofthe airline industryCRISPR-Based Gene EditingStill in its infancy, the worldwideCRISPR technologies market isexpected to grow to 10 billionby 2025 2017 CitigroupThe Rise of the Citizen DeveloperLow-code development platformsenable “citizen developers”to build professional-gradeapplications with little formalsoftware development training
Passive Investing andNew Pricing ModelsSliding management fees basedon relative performance couldhelp active managers competeagainst the growing popularityof passive fundsHyperloopA system of vacuum-sealedtubes are planned that canpropel capsules with people orfreight up to 760mph — fasterthan air travelInternet of Things PaymentAdding a payments layerto IoT applications helps inthe proliferation andmonetization of IoTBlockchain and CommoditiesTrading of physical commoditiesand electricity markets could besignificantly changed by the useof blockchainLiquid BiopsyLiquid biopsy could be a 10billion market over the nextdecade as one of the mostimportant clinical advancementsin cancer detection
Citi GPS: Global Perspectives & Solutions6November 2017ContentsThe Big Company Innovation DilemmaBlockchain in CommoditiesThe Rise of the Citizen DeveloperCRISPR-Based Gene EditingHeat Not Burn TobaccoHyperloopIoT PaymentsInvestment ManagementLiquid BiopsySmart Robotic ToolsUnmanned Commercial Aircraft 2017 Citigroup710152127323945515559
November 2017Citi GPS: Global Perspectives & SolutionsThe Big Company InnovationDilemmaCan Big Companies Innovate?Nathan FurrAssistant Professor of Strategy, INSEADNathan Furr is an Assistant Professor ofStrategy at INSEAD, where he teachesinnovation and technology strategy. Heearned his Ph.D. from the StanfordTechnology Ventures Program at StanfordUniversity and holds BA, MA, and MBAdegrees from Brigham Young University.Nathan is a recognized expert in innovation,entrepreneurship, and value creation, coauthoring The Innovator’s Method (HarvardBusiness Review Press, 2014) and Nail Itthen Scale It: The Entrepreneur’s Guide toCreating and Managing Breakthroughinnovation (NISI Institute, 2011). His articlesappear in Harvard Business Review andSloan Management Review. In addition,Nathan contributes to Forbes, Inc. and othermagazines on issues of innovation, valuecreation, and technology strategy.Can big companies innovate? On the one hand, the roster of big companies thatfailed to innovate is long: we remember the fall of major titans like Kodak, Palm,Nokia, Atari, Polaroid, and others. On the other hand, the drum beats of disruptionhave become so all-consuming that it can be easy to forget that some bigcompanies have reinvented themselves — companies like IBM, 3M, Netflix, TheNew York Times, ING, Vanguard, and Microsoft, among many others. Moreover,some companies retain their innovation capabilities from the start — giants likeAmazon, Salesforce, Google, and others — are still innovators, creating impactfulnew products and services despite their size. Even more intriguing, some largecompanies have managed to regain their innovation capabilities, after losing them,including examples like Microsoft, Intuit, Procter & Gamble, and even Apple whichwas once pegged for imminent collapse. So what then separates the innovatorsfrom the non-innovators?For the last fifteen years, I have been studying how established companies caninnovate, whether responding to digital transformation, reinventing their corebusiness in the face of disruption, or simply renewing themselves ahead ofcompetitors. What I’ve discovered is that we all operate based on a set of mythsthat misshape the truth about innovations. Sometimes these myths are about thesize of the company, sometimes they are about our own capabilities, but in eachcase these myths are built around a story that some people, or companies, are justspecial while the rest of us cannot innovate. But in each case, research reveals thatwhat separates the innovators from the non-innovators is not who they are but whatthey do. At the risk of over-simplification, what separates out the large companyinnovators tends to fall into three categories: people, process, and philosophy (acatch-all that includes culture, leadership, and other organizational issues). Let mebriefly summarize this research, trying to be specific but concise.PeopleWe often tell ourselves we need new people to respond to the waves of digital andtechnology. Clearly we need to recruit capabilities for a digital world — analytics,coding, and related activities — or the related disruption we face. But when it comesto innovation, big companies have far more innovation talent than they realize.Research in psychology reveals that creativity is only 33% genetic and thatcreativity can be increased about 30% on average just by explaining the elementsof creativity to a participant. In my early research on what makes innovators likeElon Musk or Jeff Bezos creative, we discovered five key behaviors that separatethese people from others.These individuals: 2017 Citigroup1.constantly associate disparate domains,2.question the status quo,3.observe familiar settings to spot new problems,4.follow their intuition to experiment in their lives, and5.network to get ideas, not resources.7
Citi GPS: Global Perspectives & Solutions8November 2017Said out loud it seems simple, but in my work I teach people how to practice, getbetter, and most importantly, spot the people in their organization who are alreadygood at these things and set them free.ProcessEstablished companies that successfully innovate also work in different ways thanthose who do not. Sometimes these innovators have embraced a framework youmay have heard of, such as design thinking, lean start-up, agile, or business modelinnovation. You may have even wondered which one is the “right” framework. Theanswer, frankly, is none of them. Although they all reveal something crucial aboutthe innovation process, they are all simply different lenses on the same problem.Most big companies that adopt one, soon find they need to adopt another to fill inthe missing gaps. In my research (summarized in the Harvard University Pressbook, The Innovator’s Method), I synthesized these many frameworks to describethe underlying process, identify where big companies get stuck, and suggest toolsto overcome these bottlenecks.The process itself is quite simple (see Figure 1), but the magic comes fromunderstanding how to avoid the most fatal traps. The first, may be resolving each ofthe elements — problem, solution, and business model before scaling up theproject, perhaps the biggest source of failure in big companies obsessed by scale.But we also stumble, failing to understand the real problems we are solving (70% ofcorporate initiatives fail because they do not first understand the problem they aretrying to solve) or because we don’t truly understand the power of descoping tocreate radically simple minimum viable prototypes. By applying the right process,I’ve seen big companies turn around their innovation capabilities.Figure 1. The Innovator’s MethodSource: Nathan Furr 2017 Citigroup
November 2017Citi GPS: Global Perspectives & Solutions9PhilosophyLastly, big company innovation happens in a context—in an existing culture andstructure which tend to choke innovation to death. But established companyinnovators tend to perform four roles well—they complement their core businessactivities with being the chief experimenter, architect, venture capitalist, and catalystof innovation. Let me focus on two ideas. First, rather than seeing yourself as thechief decision maker, whose job it is to make the call or lay out the path for others tofollow, innovators recognize that when they face the uncertainty of innovation,transformation, or disruption they need to become the chief experimenter. Trying topredict the future when you are in the fog of the unknown almost inevitably spellsdisaster because you are bound to be wrong. Scott Cook, Executive Chairman offinancial software company Intuit, describes this as the moment that he realized hewas not Steve Jobs nor did he have to be. Instead, when facing uncertainty,leaders can apply what Scott Cook characterizes as “a new kind of managementwhere instead of seeing the boss’s role as the Caesar, the boss’s role is to put inplace a system whereby junior people can run fast and cheap experiments so ideascan prove themselves.” Although it sounds simple on the surface, this represents aprofound change in how you lead into the unknown.The Bigger Picture — The New Science of Managing InnovationAs the world becomes more dynamic and uncertain, increasingly executives arefeeling the demand for new ways of managing. Whereas a company making it intothe S&P 500 in the 1930s could expect to be among the industry titans for 75 years,today a company joining this group can expect to endure their time on the throne forjust 12 years. Our more familiar classical management tools, built in response to thedemand for optimization following the industrial revolution, need to becomplemented with tools to achieve our most critical tasks today—seeing andcreating the future. Many of these tools have been developed only recently, someremain to be developed. But one could say the dynamic world in which we liveneeds an innovation school, to complement the business school (see Figure 2).Using these tools you too can invent the future, not just watch it erode thefoundation on which you stand.Figure 2. Classical Management vs. InnovationB-School(traditional management)I-School(entrepreneurial management)Core FocusExecute in certaintyExperiment in uncertaintyStrategyProtect existing resourcesLeverage existing resourcesSustain competitive advantageCircumvent resourcesDiscover or build new resourcesTemporarily ignore advantageOrganizationalBehavior/HRHire experts (I-shaped people)Hire for divisional rolesHierarchical organizationHire generalists (I-shaped people)Hire for multifunctional rolesFlat organizationLeadership andteamsVertical teamManager-supervisee structureMaximize and optimizeHorizontal teamPeer group structureMinimize and sufficeOperationsEfficient routines for executionLonger cyclesAvoid errorsFlexible routines for searchRadically short cyclesEmbrace errorMarketingFull-featured, appealing productQuantitative market segmentationBuild and protect brandMinimum feature set productQualitative customer interactionTemporarily ignore brandFinance andAccountingMarginal cost logicFixed costs to lower average costFull cost logicAvoid fixed costs to be flexibleSource: Nathan Furr 2017 Citigroup
Citi GPS: Global Perspectives & Solutions10November 2017Blockchain in CommoditiesRevolutionizing the Physical and Financial TradingCommodities and ElectricityAnthony YuenGlobal Energy StrategistEdward L MorseHead of Global Commodities ResearchAdriana Knatchbull-HugessenCommodities Research AnalystPraful MehtaU.S. Power, Utilities & Renewables AnalystBlockchain can be a substitute system thatis cheaper, faster and more secure thantraditional organized trading exchangesBlockchain is best known for being the underlying technology of cryptocurrencyBitcoin. It works basically as a distributed ledger that records ownership assetsthrough a shared registry, a copy of which is held by every entity in the network.This distributed ledger is different from a traditional market trading exchange, wherea centralized ledger is maintained by a trusted third party which records, validates,clears, and guarantees the transactions. Another type of blockchain technology isan open software platform that came out of the Ethereum project, whichincorporates smart contracts. A smart contract essentially involves an “if/then”process that, if A were to happen, then B would execute automatically. For more onthe concept, please refer to the following reports: “US Digital Banking: Blockchain”and “Digital Disruption: How FinTech is Forcing Banking to a Tipping Point.”Given its characteristics, blockchain looks to be especially well-suited torevolutionize both physical commodity trading and the entire electricity sector(among other potential applications) by eliminating the function of organized tradingexchanges and substituting it with a system that is cheaper, faster, and even moresecure in diminishing counterparty trading exposures, including for banks.Physical commodity trading — the oldest form of world trade and trade finance inthe largest trading sector in the global economy — could be vastly changed by theintroduction of blockchain technology by sharply reducing the amount of requiredprocessing and confirmations and significantly reducing the working capital requiredto facilitate trading. Additionally, blockchain could also upend the centralized controlof electricity by local utilities. This is an especially important area as more of theenergy sector is being electrified — cars, individual homes, commercial space, andfactories — through self-generated or “distributed” energy, and as consumersbecome ‘prosumers’ because buildings and vehicles with surplus electricity gainedvia solar and energy storage can sell it to others in competition with central gridoperators. The distributed nature of blockchain would allow electricity to trade orflow between buildin
Disruptive Innovations series, there was a concern that the entries we were . websites that much like ‘innovation junkies’, it was taking more and more for us to get excited about things that could be disruptive and change the
Products Group, Citi 1-713-752-5405 roxana.popvici@citi.com Mike Curry Head of North American Commodities Structured Product Group, Citi 1-713-693-6866 mike.curry@citi.com Financing Global Renewable Energy with DFIs Georges Romano Regional Head of Export and Agency Finance Latin America, Citi 1-212-816-6158 georges.romano@citi.com
validating tools to help organisations foster disruptive innovation. 2.0 Understanding the Phenomenon of Disruptive Innovation. 'Disruptive Innovation', 'Disruptive Technologies' and 'Disruptive Business Strategies' are emerging and increasingly prominent business terms that are used to describe a form of revolutionary change.
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2006). One issue connected to disruptive innovation is the term itself. “Disruptive” describes the potential outcome of a specifictypeofinno-vation rather than the actual outcome. Hence, disruptive innovations, as Christensen defines them, may not be disruptive, an
