Booz & Company’s annual study of the world’s biggest R&D spenders shows why highly innovative companies are able to consistently outperform. The study, now in its sixth year, has consistently demonstrated that the success of these companies is not a matter of how much these companies spend on research and development, but rather how they spend it.
What matters is the particular combination of talent, knowledge, team structures, tools, and processes — the capabilities — that successful companies put together to enable their innovation efforts, and thus create products and services they can successfully take to market. This year’s edition of the Global Innovation 1000 analyzes the capabilities systems that the most successful innovators have assembled to execute their distinct innovation strategies, and the ways they have aligned those capabilities with their overall business strategies. Innovators that have achieved this state of coherence consistently and significantly outperform their rivals on several financial measures.
Every company among the Innovation 1000 follows one of three fundamental innovation strategies:
- Need Seekers actively and directly engage current and potential customers to shape new products and services based on superior end-user understanding, and strive to be the first to market with those new offerings.
- Market Readers watch their customers and competitors carefully, focusing largely on creating value through incremental change and by capitalizing on proven market trends.
- Technology Drivers follow the direction suggested by their technological capabilities, leveraging their investment in research and development to drive both breakthrough innovation and incremental change, often seeking to solve the unarticulated needs of their customers via new technology.
While no one or another of these strategies offers superior results, companies within each strategic category perform at very different levels. And it turns out that the top 25 percent of performers in each category focuses tightly on a very narrow, consistent set of capabilities across the R&D value chain that are quite different from those on which their weaker rivals depend.
Putting together the necessary innovation capabilities, however, will not ensure superior financial results. Companies must also match up those capabilities with an equally consistent set of overall companywide capabilities related to such functions as manufacturing, logistics, sales and marketing, and human resources. Companies whose innovation strategy are closely aligned with their corporate strategy can be said to be “coherent.” This year, the study found that such companies do indeed gain a “coherence premium” over others in their industry. The top third of companies in terms of coherence had 22 percent higher profit margins, on average, than companies in the bottom two-thirds, and they achieved 18 percent greater market capitalization growth as well.
These results demonstrate the importance of approaching innovation in terms of creating the capabilities needed for success, focusing tightly on them, and coherently aligning them with corporate strategy.
- Download the 2010 Global Innovation 1000 study (PDF, 677KB)
- Download the 2010 Global Innovation 1000 discussion deck (PDF, 460KB)
- The Innovation 1000 archive: 2005-2010