Innovation: Why corporate culture is key

Booz & Company, the US management consulting firm, has been producing its Global Innovation 1000 study for seven years. This study consistently demonstrates that certain companies succeed in producing innovative new products and services year after year and as a result generate superior financial results. This year’s survey shows that the success of these companies is not a matter of how much they spend on research and development, but rather how they spend it.

The 2011 Innovation 1000 report considered two specific qualities: strategic alignment and a culture that supports innovation. It appears that whatever a firm’s innovation strategy, corporate culture is key to innovation success, and its impact on performance is measurable. Specifically, the 44% of companies who reported that their innovation strategies are clearly aligned with their business goals – and that their cultures strongly support those innovation goals – delivered 33% higher enterprise value growth and 17% higher profit growth on five-year measures than those lacking such tight alignment.

It is surprising that according to the results of this year’s Global Innovation 1000 study, that only about half of all companies say their corporate culture robustly supports their innovation strategy. Moreover, about the same proportion say their innovation strategy is inadequately aligned with their overall corporate strategy.

The research underpinning the report shows that there is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies, most notably Apple, consistently underspend their competitors on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they and their shareholders might hope for.

Booz & Company also asked innovation leaders participating in the survey to name the companies they considered to be the most innovative in the world. For the second year in a row, Apple led the top 10, followed by Google and 3M. This year, Facebook was named one of the world’s most innovative companies, entering the list at number 10. In a comparison of the firms voted the 10 most innovative versus the top 10 global R&D spenders, Booz & Company found that the most innovative firms outperformed the top 10 R&D spenders across three key financial metrics over a 5-year period – revenue growth, EBITDA (earnings before interest, taxes, depreciation, and amortization) as a percentage of revenue and market cap growth.

Three Corporate Strategies

As in previous years, Booz & Company classified the companies that responded to their survey into the three core innovation strategies using an online Innovation Strategy Profiler. The profiler characterizes a company’s innovation strategy based on its approach to incremental versus breakthrough innovation and the role that end customers play in defining future product needs.

• Need Seekers actively and directly engage both current and potential customers to help shape new products and services based on superior end-user understanding. These companies work to be first to market with the resulting new products and services.

• Market Readers closely monitor both their customers and competitors, but they maintain a more cautious approach. They focus largely on creating value through incremental innovations to their products and being “fast followers” in the marketplace.

• Technology Drivers follow the direction suggested by their technological capabilities, leveraging their sustained investments in R&D to drive both breakthrough innovation and incremental change. They often seek to solve the needs of their customers through leading-edge new technology.

Worldwide R&D spending among the Global Innovation 1000 rose at an annual rate of 9.3% to US$550 billion in 2010, rebounding strongly from its recession-induced decline in 2009; the first fall in the more than 10 years of data in Booz & Company’s annual study. The spending on innovation during 2011 was also 5.6% above the pre-recession total of $521 billion in 2008.

To access the full report, follow this link: Booz & Company Global Innovation 1000 survey

IB Style Questions

Read the Global Innovation 1000 Survey and then answer the following questions:

1. Define the following terms:

• Corporate culture
• Research and development

2. Explain the following quote from the research findings:

“Successful tech drivers must strike the proper balance between the pure R&D that in the past led to high-tech breakthrough innovations, and more market oriented activities.”

3. Analyse the factors affecting innovation identified in the Booz & Company report.

4. Evaluate the role of innovation in achieving a firm’s marketing, strategic and corporate objectives.

Extension activities

Students should be placed in groups and provided an industry to investigate. They should examine the proposition in the Booz & Company report that:

“The most successful innovators ensure that their culture not only supports innovation, but actually accelerates its execution.”

The group should consider a maximum of three firms in the chosen industry.  Findings should be presented to the rest of the class.