Every economic downturn comes with the same refrain: The world, we’re told, is losing its creative capacity, hurting our chances for a speedy recovery.
Yet inevitably, when worries about innovation erosion surface, some company rises up with a great new product, technology, or service to prove the naysayers wrong. And all too often, observers simply fail to pay attention to the many companies that make successful innovation part of their regular practice — indeed, their operating model — in ways that don’t necessarily make big headlines.
Those companies are the quiet stars of our annual Global Innovation 1000 study of R&D spending. As our study has consistently shown over the past eight years, there is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance (see box below); instead, what matters is how companies use that money and other resources, as well as the quality of their talent, processes, and decision making.
Those are the things that determine their ability to execute their innovation agendas. In 2011, corporate spending among the Global Innovation 1000 increased 9.6 percent over the previous year to $603bn, slightly faster than the 9.3% gain in 2010 from the 2009 spending level. But because corporate revenues grew by a robust 13% last year— even faster than the year before — to a staggering $17.6 trillion R&D intensity, or the percentage of sales that companies spend on innovation, actually declined to traditional pre-recession levels.
Of course, some companies get more bang for their innovation investment buck than others. Over the past few years, we have carefully analyzed the innovation strategies, capabilities, and cultural factors that enable some companies to consistently achieve superior financial results.
This year, to further clarify those performance drivers, we surveyed nearly 700 companies and interviewed 12 senior innovation executives and chief technology officers at leading companies. Our goal was to gain insights into the early stages of innovation — when companies generate ideas and then decide which ones to develop.
The Up-Front Process Revealed
Perhaps the most surprising result of our study of the up-front innovation process is how many companies say they simply aren’t very good at it. Just 43% of participants said their efforts to generate new ideas were highly effective, and only 36% felt the same way about their efforts to convert ideas to product development projects. Altogether, only a quarter of all respondents indicated that their organizations were highly effective at both. (See Exhibit 1.)
“If you have a creative idea and it doesn’t create value,” says Matthew Ganz, vice president and general manager of research and technology at the Boeing Company, “it’s not technology. It’s art. If you’re all about value creation with no creativity, the accountants are going to take over. You need to prime the pump with creative ideas, and then you need to have rigorous processes in place to turn those ideas into dollars.”
The second critical finding calls into question a common assumption about innovation. It’s often said that the means by which companies seek out and find good ideas tend to be vague, or fuzzy, or highly variable from one company to another.
Yet according to our survey, the most successful innovators in all industries have developed a variety of consistent, manageable ideation practices that are well aligned with their innovation strategies. And when moving ideas into the development stage, they tend to depend on an equally consistent set of principles and processes. Indeed, any company in any industry can take advantage of these tools and processes to get the most out of the money they spend on innovation.
The types of techniques and tools they employ, however, depend in large part on each company’s favored innovation strategy (although these distinctions are more pronounced in the ideation stage). A great deal of the work we have done in the annual Global Innovation 1000 studies over the past several years has involved teasing out the different ways companies approach innovation, and the implications of those approaches.
Five years ago, our research showed that nearly every company follows one of three fundamental innovation strategies, each of which has its own distinct way of managing the innovation process and its relationship to customers and markets. We thus categorize companies as Need Seekers, Market Readers, or Technology Drivers.
Need Seekers, such as Apple and Procter & Gamble, make a point of engaging customers directly to generate new ideas. They develop new products and services based on superior end-user understanding. Their goal: to seek out both articulated and unarticulated needs, and then to try to get their new products to market first.
Market Readers, such as Hyundai and Caterpillar, use a variety of means to generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to their products. This implies a more cautious approach, one that depends on being a “fast follower” in the marketplace.
Technology Drivers, such as Google and Bosch, depend heavily on their internal technological capabilities to develop new products and services. They leverage their R&D investments to drive both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology.
As in the past, our results this year suggest that following a Need Seekers strategy, although difficult, offers the greatest potential for superior performance in the long term. Fifty percent of respondents who defined their companies as Need Seekers said their companies were effective at both the ideation and conversion stages of innovation, compared with just 12% of Market Readers and 20% of Technology Drivers. These are the same companies, by and large, that consistently outperform financially.
It is critical to remember, however, that companies can significantly outperform their peers no matter which of the three strategies they follow. A far more critical factor is how well they follow their chosen innovation strategy: Is it tightly aligned with their overall business strategy? Have they put in place the innovation capabilities needed to support their strategy? Do they have the right corporate culture needed to make that strategy work? And are they using the tools and processes that will yield the best new ideas and development projects, consistent with their innovation model?
Companies that can coherently align all these aspects of the innovation process, and execute them well, have a distinct advantage in the race for new ideas, products, and services.
And, as the business environment becomes ever more competitive, the need to innovate successfully becomes ever more acute.
Box: The 10 Most Innovative Companies
For the third year in a row, Booz asked our survey participants to name the companies they thought were the world’s most innovative. This year, Apple didn’t just top the rankings (as it did the past two years); it increased its lead substantially.
The company — which in August 2012 became the most valuable in history, measured by market capitalization — was named by almost 80% of respondents as one of the three most innovative companies in the world, up from 70% last year. Google held steady at number two; 43% of respondents included it among the top three, essentially unchanged from last year. 3M also maintained its position of high regard among respondents. It may not make headlines often, but the company again took third place, capturing the votes of just more than 15% of respondents. (See Exhibit F.)
Apple’s unchallenged position comes in a year marked by the death of the company’s founder and chairman, Steve Jobs, and by the absence of any truly new product introductions. Although the company’s absolute spending on R&D over the past three years has nearly doubled, to $2.4bn, it still spends just 2.2% of its sales on its innovation efforts, well below the average of 6.5% for the computing and electronics sector. And despite being one of the 2011 industry sales leaders in 2011, with $108bn in revenue, Apple’s absolute R&D spend ranks only 16th within its industry and 53rd overall within the Global Innovation 1000. In contrast, Apple’s longtime rival Microsoft was the top spender in the software and Internet sector, and was ranked by respondents as the sixth most innovative company.
The 10 most innovative companies handily outperformed the top 10 spenders on R&D on several financial metrics — market cap growth, revenue growth, and earnings as a percentage of revenues (after normalizing for industry variations). (See Exhibit G.)
Indeed, this year’s top 10 spenders actually underperformed in terms of both market cap and revenue growth, compared with their industry peers. And were it not for new entrant Amazon’s slim margins, the top innovators would have vastly outperformed their peers on earnings as a percentage of revenues.
Also contributing to this article were s+b contributing editor Edward Baker and Booz & Company senior associate Marc Johnson and senior consultant Jane Kim.
This excerpt was drawn from the article, The Global Innovation 1000: Making Ideas Work, originally published in the Winter 2012 issue of strategy+business magazine. To read the full article visit www.strategy-business.com.
Booz & Company’s Global Innovation 1000 Study microsite, booz.com/innovation1000.
Booz & Company’s online innovation strategy profiler, booz.com/innovation-profiler: Evaluate your company’s R&D strategy and the capabilities it requires.
For more thought leadership on this topic, see the s+b website at: strategy-business.com/innovation