Growth Strategy and Innovation

An interview on Growth Strategy and Innovation – Mr. Dirk Miller, Vice President, Siemens.

Mr. Miller believes investments in research and development is the most effective growth strategy for companies today. This principle applies to every company, but it’s especially true for a high-tech company like Siemens, which has set itself the goals of growing twice as rapidly as the worldwide gross domestic product and occupying leading market positions while maintaining sustainable profitability. In pursuit of these goals, Siemens is focusing on the megatrends of urbanization, demographic change and the challenges they pose with regard to energy, infrastructure, healthcare and the environment.

What does it take to innovate?

The majority of executives say it involves achieving technological leadership, global presence and a comprehensive portfolio of patents that will enable the company to help define major trends regarding products, systems and services, and to offering its customers important added value. They say such steps reduce costs, increase sales and achieve higher earnings. But how does one come up with new solutions, and can innovations really be part of a strategy plan? Arcus’ multi-industry survey of senior executives, conducted with the Canadian Marketing Association, found that of all the challenges companies face in this area, the biggest challenge is finding ways to create a “climate for innovation”.

As Arcus research indicates, doing so means that you need to be surrounded by highly talented people.  It also means finding a way to transmit your passion to them, so they will buy into your vision of the future, perform at the highest possible levels, and come up with innovative solutions to the challenges of achieving the vision. No surprise, then, that the topic of innovation has been gaining ground as CEOs seek to incorporate concepts like “a culture of innovation” into their assessments of a company’s long-term value.

Please share some insight into Siemens’ commitment to Innovation.

Mr. Miller:  Siemens was founded a hundred and sixty years ago in 1847 by Werner von Siemens, the inventor of the pointer telegraph.  The pointer telegraph was, at that time, a unique new product that allowed people to communicate over a distance of eighty kilometres. Since then, innovation has been part of our company’s lifeblood. Everything we do is driven by innovation, technology and engineering. And you can see this throughout the company’s history.  A couple of years after Werner von Siemens’ introduction of the pointer telegraph, Siemens had another innovation, the electrical dynamo. Then in the early twentieth century Siemens invented the Coaxial cable.  The vacuum cleaner was invented by Siemens in 1906. In 1974, we developed the computer thermograph, an imaging system, an important innovation for healthcare. In 2003, Siemens produced the Transrapid, Shanghai’s high speed train. Over the last hundred and sixty years we’ve become very convinced that innovations keep us competitive.

“Innovation is one of our three core values within the company. Over 32,500  of our employees work in R&D.”

You identified a need and then created a product to meet that need?

Mr. Miller:  Yes. That’s a good point. We strongly believe that any innovation begins and ends with the customer. It’s like what you mentioned before: in order to generate ideas for inventions or to start or focus your research efforts, you have to have really intensive dialogues with your customers and all different stakeholders.

What makes Siemens’ approach towards innovation different philosophically from other companies that operate in the same area?

Mr. Miller:  I cannot talk about our competitors and how they have set up their own programs but I can definitely explain how Siemens approaches innovation. First of all, innovation is one of our three core values.  Those values are Responsibility, Excellence and Innovation. They are part of our culture, and therefore we have put in place a number of tools and platforms to encourage our people and where to foster innovative thinking and innovative processes. For example, Siemens has a really large R&D department. Over 32,500 employees worldwide are working in R&D. We have over 17,000 software engineers. We have more software engineers than Microsoft. All of that software is in all of our products today.

Would you say how products interact with customers is an important part of where innovation is going?

Mr. Miller:  It definitely is one element. As an example, if you have an easy to use interface for a device, then you can be much more efficient and you can avoid mistakes. You can simplify processes and so on. I think that’s all about innovation. Innovation should always [have a] better economic value than a solution that is available today. So, it’s a little bit of everything. Innovation can really be a technological step forward, or a totally different type of application, but it can also simply be a more cost efficient or time efficient way of doing things.

An important part of innovation for Siemens is that we understand and establish our R&D on a global scale, in over thirty countries all over the world. So we have innovation R&D in Princeton, US; we have R&D in India; we R&D in Germany and Austria, and in smaller and larger locations. That’s another aspect which I would say is very important for Siemens as a culture. Innovation and R&D is not just the mandate and the assignment of a central department with crazy engineers and smart brains. It’s really embedded all over the organization.

That’s what the third insight seems to be: creating a culture, embedding it and making it a way of life.

Mr. Miller: Yes, it starts with a worldwide employee suggestion program which is heavily promoted and communicated. It’s not just researching on technology and basic electrical and electronic issues; it’s really striving for innovation in the smallest thing. Like sharing ideas, rewarding ideas, implementing those little things. That’s a program which can really foster the culture of innovation.

The fourth big insight here would be creating a channel of communication to quickly share ideas and recognize the best ideas?

Mr. Miller: In addition to that, we measure our output, our innovation, by counting the inventions and counting the patents we file and have active. For example, in 2007 we had 7,900 inventions in Siemens, worldwide. We have over 50,000 active patents. And last year we filed 8,200 inventions, which is pretty much 40 inventions per working day.

We also measure the impact of our inventions and innovations. Some quantitative KPIs are inventions we can file and register patents for.  Within the employee suggestion program we measure so-called “value-benefits” which can be generated in terms of dollars or Euros.  We try to measure this as concretely as possible; that’s very important. Then, we communicate very actively. We have a press conference once a year where we present our outstanding inventors to a global media audience. We have an internal competition called “Inventors of the Year” and last year we nominated twelve winners. Then we feature those winners as good examples in our internal media on the web, on the internet, and externally in brochures. This is in order to make the organization and all employees aware that those people are responsible for our future.

 “We strongly believe that innovation begins and ends with the customer.”

Does public recognition motivate employees? 

Mr. Miller: There are different aspects to this. We know innovation always has a financial and business impact as well; we are not doing research and development for the sake of research and development. We would like to get a competitive advantage, we would like to solve some issues and provide the best technology for our customers in order to make a profit. So, [you always have to consider] the financial dimension as well.  We have to do this in order to foster the understanding that we invest almost 5 percent of our annual turnover in R&D. We have to communicate the technology, the advantage and the innovation power of our company and product. This has to be done with communications internally and externally.

Could you talk a bit about two, three industries and what’s happening in them around innovation?

Mr. Miller: Absolutely. First, it may help to know that Siemens is actually divided into three sectors. For more than a year now we have focused our portfolio in three sectors. The first sector is industry, the second sector is energy, and the third sector is healthcare. I can give you an example for each of these elements. Before I start with these three sectors I have to address a few so called “mega trends” we have designed, where we try to find answers and try to provide solutions and products to deal with challenges. One of the mega trends we have identified in different studies is the issue of urbanization. 2007 marked the first time where more people lived in cities than in rural areas. Two hundred and eighty million people live in so called “mega cities.” We have the same situation in Canada: 75 percent of our population lives close to the border to the US and we have major hubs like the GTA and so on. We have the same challenges here, the same situation. The resulting challenge is infrastructure.  Infrastructure means public transportation, it means manufacturing goods requested and needed, in those urbanized areas in an eventual time frame. This definitely has some implications on industry. For example, worldwide, more than one billion people live without drinking water.[To deal with this, we offer water purification systems. We are working on the disposal and the reuse of waste water.

So Siemens is driven by the top three mega trends?

Mr. Miller: We have identified three trends. The first one is urbanization, the second one is the demographic change—the population in total on this planet will grow from six billion today to eight billion by 2025. The [third one] is that we have an increasing global life expectancy. This means that in 1950 we had an average life expectancy of 46, 47 years. By 2025, the average life expectancy will be 72. That’s significant.

Again, we have the same situation in Canada as is seen in worldwide trends. The population is aging. An aging population means we have challenges in infrastructure. You need a different type of transportation. You need a different environment in regards to access to buildings. You need different offerings when it comes to culture, restaurants and public infrastructure- it must become more efficient infrastructure. You have a higher demand on healthcare and elder care. Siemens brings a lot of innovations to the table.

For example, we have computer thermographs and MRI systems. Due to these technological advancements, for example, health care practitioners can do examinations in  a very short time frame, without additional medication, increasing the efficiency of a hospital’s workflow while decreasing waiting time and pressure on patients.

 “I think we are one of the few companies that has proven testimony on the volume of CO2 abatements we produce.”

The environment is on everyone’s minds right now.

Mr. Miller: It’s on our agenda as well. In fact we have a really good position in regards to this because today our portfolio is all over it. Our global turnover is already 19 billion out of 80 billion. It is already driven by products and solutions for environmental protection and energy efficiency. It’s growing very fast. It will be 25 percent. Now it’s around 18 or 19 percent. It will be 25 percent of our overall turnover by 2015 or so.

Is the environment is a business opportunity for Siemens?

Mr. Miller: Absolutely. A very great and important one. And there’s another very important aspect of this. By using our products, for example, you already contribute to a reduction of CO2 emissions, twenty-five times higher than our own footprint. We get this on a global basis and it’s verified by an independent audit. I think we are one of the only companies who really have proven testimony on how many CO2 abatements we produce. In 2007 our greenhouse gas emission was 5.1 million tonnes. And our products already realized an abatement of over a 140 million tonnes. And this will be almost doubled and more than doubled by 2011. Using our products in different areas—and this is calculated mathematically—our customers will reduce the CO2 abatement of 275 million tonnes. This is the equivalent of six major mega-cities a year, combined—Rome, Hong Kong, Singapore, London, New York and Tokyo.

Innovation really starts and ends with the customer. It’s related to the three mega trends we have identified: urbanization, demographic change and climate change—environment. And we really have a culture of innovation which is embedded in every single office within the company. We know we have to be innovative in order to define the future–to establish a good future financially, a sustainable future for our country.

If you were to advise CEOs on how to make their company more innovative, what would be the three things you would tell them?

Mr. Miller: I have two things to say, anyway.  I would say the first thing is to be as specific as possible with your R&D and your innovation programs—that means you have to listen to your customers and you have to screen your market very carefully. You cannot just do innovation for the sake of innovation. You need someone who really needs it. Give more meaning to the whole process. It’s not always a good approach to do what is possible technology-wise; you really have to find a market for it as well.

It starts with a market and start with the customer. The second thing is that you have to embed this in your business models because it’s proven—and we already have a lot of numbers and figures internally that can really show this—that if you define markets and if you can determine the technology of the future and you have a very fresh product portfolio, you can normally generate more profit than if you are just a follower. These are the basic two principles of economics—either you lead by product, by benefit, by advantage, or you lead by cost. There’s more profit available, more margins available, if you are a technological leader. But you have to make this basic position.

Please comment on today’s business environment and on whether innovation is taking a backseat—Is it innovation focused on cost instead of growth?

Mr. Miller: That’s a good question. I’m not too decided on what is right and what is wrong in this situation. I strongly think that just focusing on the cost and being the cheapest or the most cost-efficient supplier of products [makes the] potential to become better and to be more efficient very limited. You can do some global sourcing, you can do some off-shoring, use some low cost countries, you can you can improve your processes as best as possible. But at a certain level you have your cost and you cannot further improve your cost position.

“There needs to be some conviction at the top to innovative consistently, especially in difficult economic times.”

We try to focus on both cost and growth, but that’s the advantage of a large company like Siemens with 400,000 employees worldwide. We have two programs which are pretty much on the same level of importance. One is focusing on growth opportunities, gaining market share, fostering an innovation culture and launching new products and defining new markets, addressing new markets and so on. It’s pretty much listening to what the customer needs. That’s one major pillar. The second pillar is all our efficiency programs, cost reduction programs, global sourcing, shared services, all those programs which really try to optimize cost position. We are doing both. The most competitive companies have already made the move towards the latter whereas the less competitive ones are still focused on outsourcing and all those other things you are talking about.

You can see this, especially in this current economic situation. It’s very difficult to predict the future. Whenever you adjust being compared by cost, it’s very difficult. Currency exchange rates change, the oil price changes all the time. Let’s have a look at the Canadian manufacturing industry for example. A few months ago everything moved to Mexico and elsewhere because Canada was not cost competitive enough. Now, if you take the currency exchange rate to the US dollar, the situation looks quite different again.