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Innovation Intensity

 

Why Measure Innovation

Sometimes, just because it’s taken for granted, the obvious becomes a really important thing to test. Maybe it was that one cynical conversation too many with the CxO about “real” priorities, operational performance, capacity expansion and business efficiency that set me doubting whether product development really is necessary or useful. A well managed RFI/RFP process controlled by Procurement may be a much better way to engage hungry and competitive suppliers and source new stuff. After all “Elite Circles” and “Consortia” are two of the Collaborative Innovation models proposed by Roberto Verganti. And they sound like an RFx process to me.  
 
       

How to Measure Innovation Intensity?

So how to check out who is really innovating and whether they are actually generating any tangible value. A rough measure of innovation intensity can be gained from surveying the web news. Pick a company and then, using Google’s News Archive Search, measure how many web articles mention their name and in turn how many of those same articles include the word “innovation”. It’s crude and simple but seems to pass the sanity check and the ratio does yield an independent measure that at least approximates a company’s “innovation profile”. I know there are many uncontrolled variables and it certainly doesn’t have the rigor of professional research but its “satisficing”.

Based on some background experience plus a few areas of personal business interest I picked 100 listed companies. I limited the survey to 2009/10 news articles to keep it current and obviously because I was also searching for the word “innovation” had to stick with English language web sites. Occasionally I found a smaller business that didn’t appear to have published any qualifying news articles and so unfortunately had to exclude them from my sample.  
 
 

What Did the Survey Show?  

The following table summarises all results for this sample of 120 tier 1 global companies:
 
 
 
Based on this measure of “Innovation Intensity” (II) there is clearly a wide range of innovation activity occurring across different companies.
  • The average company has 2.5% of their news articles including a reference to “innovation”.
  • A small group (approx 5% in the total sample) are talking about innovation up to 3 and 4 times more often.
  • However there’s also an even larger group (approx 25% in my sample) that don’t appear to be associated with “innovation” much at all.
  • The firm conclusion; it’ is true, not every business is embracing or even interested in innovation but some really are very interested. 

 

Who are Successful and Why?  

My simple minded assumption was that company’s innovate (or don’t) because it does (or doesn’t) add value. While product development is certainly fun in itself, I’m still searching for that tier 1 listed company whose primary business goal is just “having fun”.

A useful mantra is that “the success of innovation is ultimately judged by the market”; through things like competitive differentiation, brand reputation and premium pricing. Financial accounting is an industry that’s knee deep in metrics quantifying the market valuation of a business. So after some thought the metric chosen to quantify the relative value of innovation was the simple P/E ratio. The market is certainly the arbiter of a company’s P/E and Nobel prizes have been won showing these markets are informed and efficient. So, all things being equal, it’s expected that more innovation would help generate higher P/E. While (as ever) all things are never equal, exceptions can become obvious and, after all, I’m only searching for some hope, so even a trend would be useful. To avoid some of the “exceptional market valuations” the stock market creates, my sample of companies was restricted to a mid-range market valuation of 5<>30.

So what happens if this Innovation Intensity (II) is now correlated against a company’s current P/E? Because the II Index was captured using only 2009/10 news articles there’s an implied assumption that innovation “released” to the market over the past 12months it will influences the current market’s view of a company’s P/E ratio.
 
 

And What Were the Results

What did the correlation show? Well as expected it showed a range of results but the analysis indicated (with some relief) greater Innovation Intensity (II) is associated with higher company valuations (P/E).  
 
 
In the Telecoms and Communication services sectors this trend was the most positive:
 
 

 
 
 
In the Technology and IT services sector (which often brings much of the technical innovation to the rest of the market) the trend was also positive:
 
 
 

 

 
 
 
However in some sectors including Consumer Products and Financials the correlation between a company’s Innovation Intensity (II) and its market valuation (P/E) was actually negative. The implication is that more innovation for these company’s may actually erode market value.
 
 
 
Perhaps innovation becomes a distraction or a disruption from the more necessary stability, security and control. 
 
 
 
 

 

 
 
 

So What Does It Mean? 

Well with some personal relief it does appear to provide reassurance that new product development is worthwhile, at least in some of the more technology or design based industries.  But it’s also a reminder that innovation is not equally valued by the market in every industry. That’s not to say innovation isn’t important to Banks (for example) but the analysis does suggest any innovation they undertake may be more internal and unseen to the market. The analysis also raises a variety of other questions about trends and profiles to further qualify the insight into innovation.  
 
 

And Who is Today's Winner?  

Well in my searching at least I couldn't find any company with a higher Innovation Intensity than Amdocs Limited. Almost 1 item in 10 from their 2009/10 web news references "innovation".  Now does that sounds like fun?  
 

But are Businesses Becoming Less Innovative?

 
Using the same analysis method described above, the results seem very clear:
 
Comparing the Innovation Intensity in a sample of 120 typical tier 1 companies with their "Innovation Intensity" five years ago (in 2004/05) suggests innovation has declined approximately 20% for an average tier 1 business.
 
 
 
 
 
 
 
 
 
 
 
Each quantrant represents a different approach and different prioirty for innovation: 
 
 

Innovation Champions 

20% have stronger then the average Innovation Intensity and their Innovation Intensity has grown, typically 30-35% since 2004/05 

 

 
 

Innovation Deniers  

21% have stronger then the average Innovation Intensity but their Innovation Intensity has fallen, typically 20-25% since 2004/05 

 

 
 

Innovation Aspirants  

16% have weaker then the average Innovation Intensity but their Innovation Intensity has grown, typically 30-35% since 2004/05 

 

 
 

Innovation Chumps 

44% have weaker then the average Innovation Intensity and their Innovation Intensity has fallen, typically 40-45% since 2004/05

 

 

The Conclusion: 

Most companies appear to be generating significantly less innovation compared with 5 years ago 
 
 
The critical question from this analysis is why. Why has Innovation Intensity declined? Is it all down to the GFC? Challenging times are expected (in some of the population at least)  to inspire entrepreneurship and innovation , however that fighting response may not be what we see from established businesses.  
 
There is a growing argument that traditional management methods born from the industrial revolution and maturing through production and technology revoultions may just not have the DNA necessary to adapt for a future of crowd sourcing, collaboration and open innovation.  If growth is the essence of success and innovation is the only driver of growth in a dot-net market world, are the legacy management methods and practices showing their age and their limitations? 
 
 


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