Innovation: The Hot American Business Topic – Part 1
This is the third article in a series on increasing company valuation and will be in two parts.
Innovation is at the top of the agenda of nearly every mid-sized and large publically traded American company. Here is a quick quiz: What is your firm’s percentage of each year’s revenue that comes from totally new products and services? If the answer is not at least 15-20%, your firm does not compare with the leading firms in the Global Innovation 1000, as measured by the consulting firm Booz and Company. Why do you need to care about innovation?
Michael Porter, the esteemed Harvard strategy professor, told the American Council on Competitiveness in 2007 that innovation is the only thing left for American industry to export. And his pronouncement appears to be just as true in 2011. The low cost structures found in Chinese, Indian and now South American industry are just too low for American industry to compete on price. The view is that innovation is the only way to command premium prices or hold prices in falling markets.
What should your organization’s stance on innovation be? This is a serious discussion as innovation is typically at cross purposes with operations at many firms.
Firms like Best Buy, Whirlpool, Nestle, Google, Apple, CEMEX, Procter & Gamble, Royal Dutch Shell, IBM, Netflix, 3M, Virgin, Visteon, Gore and others are looking to innovation as the catalyst for continuing rounds of profitable revenue growth and increases in firm value. They are not letting the lingering recession deter them from their path either.
The revolution of innovation is not about making just one big homerun and living on those laurels. It is about developing and embedding a deep capability for streams or even avalanches of new products and services that will win. Spending for innovation is part of the puzzle. The Global Innovation 1000 spends between 3 and 10% of revenue on R&D. This was $503 billion in 2009. But this is a surprising fact: there is no statistical correlation between the raw amount of investment on innovation and increases in total shareholder return (TSR) or firm valuation. Something else is needed to turn innovation into wealth creation.
Before we discuss some of these firms’ innovation secrets in Part 2 of this article, let’s debunk some myths. Many business people cringe at the word innovation because they associate this word with misguided efforts to increase “creativity” in employees. This swept the business world some 15 to 20 years ago and still lingers today. A leading snack foods company spent millions in creativity training, for no real benefit. Why? Psychologists tell us that our individual creativity abilities as adults are set by the time most of us are 10 to 12 years old. So individually most of us are not going to get much better at being creative. But here is the key insight: there is enough creativity residing in most firms’ people that if it is harnessed correctly, sustained innovation can happen. It is the capability to harness and channel what is already there!!!
Creativity is seeing patterns in seeming chaotic and inconsistent information that very few others see. Innovation is harnessing those creative insights to bring products and services to market people will pay for – and at a price that is profit making.
If you feel it is time to start thinking about whether to develop a deep innovation capability in your organization, ask yourself these questions, which the leading innovation firms answer yes to:
Do we have a legitimate mechanism through which most employees can dedicate 10% of their time to innovation projects?
Are leaders at every level accountable for helping employees take advantage of this mechanism?
Does top management reserve time for regular meetings where the sole purpose is to discuss the company’s innovation and growth efforts?
Do we have a significant number of people, outside of R&D and new product development, who officially work full or part time on innovation and growth activities?
Does my organization have formal programs to teach innovation skills like we did for the quality revolution of the 1980s?
Would a large percentage of employees say that innovation is part of their job?
Is innovation on my own agenda?
Do I spend a specific percentage of my time mentoring innovators?
Remember the low cost countries of China and India discussed above? They are growing their country R&D budgets four times as fast as Europe and the United States. While this is a trick of math - they are growing from smaller numbers - their commitment is there to innovation. Innovation may not be for every firm but how should your organization proceed?
Next Up: Part 2 - some secrets of successful innovators