Like other major company activities, innovation must be managed in a disciplined way. Yet innovation often is treated like a corporate stepchild. Because innovation may be scattered among many departments, the process of screening, prioritizing, and commercializing new ideas frequently is managed in an ad hoc way.
As a result, many top executives don't fully understand the innovation process, don't appreciate the full range of benefits innovation can generate, and aren't sure how to measure the payback the company receives from its investments in new ideas. Senior executives must get control of this. Those companies that manage the innovation process best—whether they're today's top brands from the West or challengers from rapidly developing economies (RDEs) like China, India, and Brazil—will likely be the global leaders of tomorrow.
Last year, the Boston Consulting Group teamed up with BusinessWeek in a global survey intended to answer a very important question: Which global companies are the top innovators and why? We surveyed more than 1,000 senior executives worldwide. Their top choices for the most innovative companies didn't produce any great surprises: Apple (AAPL), Google (GOOG), 3M (MMM), Toyota (TM), and Microsoft (MSFT) (see BusinessWeek.com, 7/31/06, "Emerging Giants").
Planning for Innovation
What did surprise, however, was the fact that while 72% of senior executives named innovation as one of their top three priorities, nearly half said they were disappointed with the returns on their investments in this area. Many admitted they didn't even know how to measure these returns. (Thus was born the new book I wrote with my colleague Jim Andrew, Payback: Reaping the Rewards of Innovation, published a few weeks ago by Harvard Business School Press.)
This uncertainty among top executives about how best to manage innovation comes at a crucial, if not critical, time. China and India have both declared innovation to be strategic national priorities. In January, 2006, China unveiled what it called its 15-year "Medium-to-Long-Term Plan for the Development of Science and Technology."
The plan calls on China to become an "innovation-oriented society" by the year 2020, and a global leader in science and technology by mid-century. The plan calls for steep increases in research and development (R&D) expenditures over the next 15 years, from 1.23% of gross domestic product in 2004 to 2.5% of a significantly larger GDP by 2020. And it sets two far-reaching goals: First, for China to become one of the top five countries in the world in the number of new patents granted for inventions, and second, as noted by the American Institute of Physics, "For Chinese-authored scientific papers to become among the world's most cited."
India's goals are no less ambitious, and are nicely captured by the slogans used to promote the 2005 and 2006 national R&D expositions in New Delhi: "Think Innovation, Think India," "Mind to Market," and best of all, perhaps, "The World's Knowledge Hub of the Future." In support of such ambitious goals, meeting sponsors remind us that "India has 380 universities and 11,200 higher-education institutions churning out around 6,000 PhDs and 200,000 engineers, 300,000 science graduates and post-graduates annually" and that R&D investment has been growing at a compounded annual growth rate of more than 40%.
In short, the competition is intensifying. Despite this reality, many companies in rapidly developing economies are still viewed as mere copycats, first making low-cost "knock-off" versions of U.S., Japanese, and Western European products for their home markets, and then adding some new bells and whistles for the low-end export market. But this is not a fair assessment. RDE companies are doing far more than just reproducing (at lower cost) what's already there. They're innovating and improving in ways that provide value to both consumers and their own brands.
We've seen this process before. In the 1950s and '60s, Japanese electronics firms provided U.S. consumers with smaller and better transistor radios, challenging—and eventually displacing—Admiral, Magnavox, Zenith, and other popular U.S. brands. The Japanese companies then introduced other products, including state-of-the-art color TV sets, which soon set the global standard for quality and reliability. By the mid-to-late 1970s, many Americans thought: If it isn't Sony (SNE), it isn't worth owning.
Up Next: South Korea
Japanese automakers similarly challenged the status quo. Before the once-dominant U.S. automakers fully realized what was happening, the Japanese—Toyota, in particular—were setting new standards for quality and design, and everybody else was playing catch-up.
The South Koreans are the current challengers. LG Electronics, which first marketed its home appliances in the U.S. under the low-end Goldstar brand, is now a serious competitor in the upscale designer market. Hyundai (HYMTF) cars, once seen and sold as "cheap basic transportation," are now challenging Honda (HMC), Ford (F), General Motors (GM), Toyota, and Volkswagen. Samsung (SSNHY), a relatively unknown electronics firm a decade ago, was named the No. 1 consumer electronics brand in the world in the 2005 BusinessWeek/Interbrand survey of the top 100 global brands.
What drives this phenomenon is not only low cost, but the ability to invent, improve, and innovate in ways that generate the necessary payback: profits, knowledge, or an enhanced brand or organization. Chinese, Indian, and other RDE companies are not all (or even mostly) copycats any more. Indeed, many RDE challengers—the Chinese electronics firm Hisense, for example, the Brazilian aerospace firm Embraer (ERJ), and the Indian pharmaceutical giant Ranbaxy (RBXLF)—now consider innovation central to the corporate culture.
Hisense is a good example. Describing itself as "a national high-tech enterprise and technological innovation base," the manufacturer of refrigerators, air conditioners, computers, and cell phones now invests more than 5% of its annual sales revenue in research and development.
The Hisense R&D Center, known internally as Tech-Incubation Park, houses more than 1,500 researchers. In 2005, the company introduced the first Chinese-made "digital media processing chip." Company scientists in just the past two years have applied for more than 400 patents.
In managing innovation, RDE firms should follow the same basic principles that businesses everywhere must follow. Innovation is not a black art, a roll of the dice, or a creative free-for-all. It is a combination of deliberate risk-taking, close management of a well-defined process, alignment of all the elements of the organization, and an unrelenting and highly disciplined focus on achieving payback.
Successful innovators have processes in place not only for generating new ideas, but for screening them and weeding out, as early as possible, those offering the least payback. Successful innovators move from "mind to market," as the Indians put it, as quickly as possible. And successful innovators manage the life cycle of products and services in a disciplined manner, understanding full well that today's innovation is tomorrow's dinosaur.
For many decades, innovation was the province of the U.S., Europe, and Japan. Those days are over. Innovation today is taking place at a rapid pace on a global scale. Chicago, Stuttgart, and Tokyo had better watch out; Delhi, Hong Kong, Shanghai, and São Paulo are getting ready to challenge.