The State of Innovation

It's not just a buzzwordthree recent surveys find innovation is still a high priority with a majority of executives across industries and across the world

For most business leaders, the dusk of 2007 is a time of transition and, well, uncertainty: Will the U.S. dollar continue its slide? How deeply will the problems of the home mortgage market affect the broader international economy? Do China, Google (GOOG), and the next presidential administration pose threats or opportunities?

But when it comes to "innovation," there is at least some agreement among senior executives. This year, surveys from three leading consultancies—Boston Consulting Group, McKinsey & Company, and Booz Allen Hamilton—show innovation remains a high priority for most corporate leaders around the world. There's consensus across industries that innovation is a key growth driver. Unfortunately, the surveys also reflect a broad belief that most companies don't have the leadership, systems, or tools to successfully and consistently innovate.

Implementing innovation isn't as straightforward as running a Six Sigma program, which makes it harder to do and harder to measure. The studies take a variety of approaches, often combining more than one. The McKinsey and BCG studies are essentially opinion surveys, with respondents answering questions about how innovation happens in their companies and, in the case of BCG, identifying other companies they believe are most innovative. Both surveys leave it to the respondents to define the term.

Global Innovation 1000

The Booz Allen report combines a survey of spending practices (using research and development budgets as a measure of innovation) with follow-up interviews. Both BCG and Booz Allen also depend on some data analysis, with BCG analyzing the stock growth of companies named as "most innovative" by respondents, and Booz Allen focusing on a company's return on its investment in research and development.

Booz Allen Hamilton's third annual study, The Customer Connection: The Global Innovation 1000, published in December and based on 2006 financial data, ranked 1,000 of the world's highest R&D spenders. Those companies, dubbed the "Global Innovation 1000" by the consultants, spent a combined total of $447 billion on R&D last year and saw revenues rise by 10%. However the researchers found "no statistically significant connection between the amount of money a company spent on innovation and its financial performance." It's the same conclusion they arrived at last year.

If the Booz Allen survey can be faulted, it is for seeming to equate R&D spending with innovation. Similar to attempts to measure a company's innovation skill by the number of patents it holds, a focus on R&D spending ignores corporate strategy, organizational culture, and other relevant factors that are harder to quantify, but crucial to the successful application of effective innovation.

Corporate Strategy and Customer Understanding

Yet the researchers recognize this, and so, for the second year in a row, they compiled a list of "high-leverage innovators"—the companies that "consistently achieve better financial performance than their industry peers while spending less on R&D." This group includes well-known innovators such as Apple (AAPL) and Google, as well as less recognizable names such as Hon Hai Precision Industry and AU Optronics. The most interesting, and valuable, parts of the survey are based on follow-up interviews with executives at these companies about the reasons for their success. This material reveals the importance of aligning innovation initiatives with corporate strategy and of in-depth customer understanding.

Notably, the Booz Allen team went further than in previous years to research how both corporate strategy and customer understanding are connected to innovation strategy. This research showed nearly all of the companies studied could be classified in one of three distinct innovation categories. The report includes mini-case studies of each. "Need Seekers" invent first-to-market products: Black & Decker's (BDK) DeWalt power tools unit, for example, builds databases of customer input gathered by in-house engineers. "Market Readers" respond to what customers buy: Plantronics (PLT) grades product success on how sales live up to forecasts. And "Technology Drivers" focus on internal research. One example: Siemens, which constantly compares its incremental goals with big-picture trends. None of these strategies, the authors state, is more "successful" than the others.

One tactic shared by all of the successful innovators Booz Allen studied was a rigorous process for managing innovation, including "a disciplined, stage-by-stage approval process combined with regular measurement of every critical factor, from time and money spent…to the success of new products in the market."

Lack of Management Strategies

McKinsey's report, published in late October, on "how companies approach innovation" almost picks up where Booz Allen leaves off. Based on an opinion survey of more than 1,000 top executives across industries, 44% of whom worked at companies with $1 billion or more in annual revenues, the report reveals how innovation happens—and doesn't—in companies today. Although 70% of the executives McKinsey surveyed (722 senior vice-presidents and 736 lower-level executives) named innovation as one of their top three priorities for driving growth, the survey reveals the inconsistent and at times counterproductive ways in which companies approach it. For instance, according to the report, "although more than a third of top managers (senior VP level and higher) say innovation is part of the leadership team's agenda, an equal number say their companies govern innovation in an ad hoc way." In other words, there is no process in place to manage—or, presumably, measure—innovation efforts.

Such a lack of innovation management strategies leaves most top managers feeling as if they "don't seem to think they have a lot of control over the innovation process," the survey concludes. This reflects the idea that innovation, at least among those surveyed by McKinsey, is not deployed as a top-down tactic. As the report states, "less than a quarter of respondents indicate that innovation budgets or targets are decided at the top."

In an effort to understand where the problems lie, the McKinsey survey asked questions about talent management (did companies have the right people? Were they allocated well? Were they protected by senior leaders?) and attitudes toward failure (was it encouraged, or punished?). Responses are broken down between those from senior VP level leaders and other executives, so the survey also reveals the clear disconnect between corporate leaders and lower-level executives, at least according to the data gathered by McKinsey. For instance, while 40% of top managers say the problem is they don't have the right employees, only 31% of other executives agreed. And among executives who said they did have the necessary talent, less than a quarter of top managers felt corporate culture inhibited progress, while almost a third of lower-ranked executives thought culture was a problem.

Tools and Processes

The two groups of executives did align on one question, however: how to boost innovation performance, starting with making innovation a core part of the leadership agenda, modeling behavior that encourages innovation, and—echoing the Booz Allen study—improving tools and processes for managing innovation risk and making better decisions.

The Boston Consulting Group's survey (, 5/4/07), carried out in partnership with BusinessWeek, tapped nearly 2,500 senior executives from 58 countries and all major industries, asking questions ranging from "which are the world's most innovative companies" to "how does your company pursue innovation."

Although BCG found the number of executives who named innovation as their No. 1 priority was down 9% from the previous year, 66% still counted it among their top three priorities. The McKinsey study supported the top-three finding by a slightly higher percentage and also confirmed BCG's results that a risk-averse corporate culture is one of the three biggest stumbling blocks. Another similar finding: The discrepancy between CEOs and other executives as to the success of innovation initiatives. The CEOs proved far more positive.

Raising Innovation Spending

The BCG study contains significant data on current and future innovation spending, which it also breaks down by region and industry. Two-thirds of respondents said their companies would increase year-over-year spending in 2007, with one in three expecting the increase to be more than 10%. Notably, the biggest spending increases—76% and 74%—were among Asian and European companies. When broken down by industry, automotive topped the chart with 76% of respondents saying they planned to raise innovation spending next year. Entertainment and media (73%) and energy (71%) took second and third.

The companies represented in the survey employ a range of metrics to measure their innovation success including customer satisfaction, overall revenue growth, and the percentage of total company sales from new products or services. No matter how they measured it, though, the majority of respondents expressed dissatisfaction with the return on their innovation investment, a frustration that varied little across industries.

Lest executives lose faith in the value of innovation, the BCG report compares the total shareholder returns of the world's most innovative companies (as voted by survey respondents) with those of their industry peers over a five-year period and finds that global innovators bested their peers by 400 basis points per year.

Clearly, while the term "innovation" may seem in danger of becoming empty jargon, the practice remains a high priority with the majority of executives. More importantly, the financial data show it's not just a buzzword. And as consultancies such as Booz Allen Hamilton, McKinsey, and BCG continue to publish research studies on corporate innovation—which they surely will, given they have a stake in its promotion—the analysis and evaluation of innovation tools and processes will help. And with each year's crop of data from a variety of reputable sources, it will also be easier for consultants and corporations to see patterns and draw conclusions on emerging best practices and appropriate metrics for innovation.

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