Innovators Enjoy Steady Growth

Internal Auditor, April, 2000 by Jonathan Figg

RECENT RESEARCH confirms a demonstrable link between company innovation and value creation, and CEOs who recognize this relationship are making innovation their number one strategic issue. According to a survey by Pricewaterhouse-Coopers, the most successful organizations of the future will promote innovation as a core capability and embrace new and unusual ways of fostering innovative thinking.

The annual survey, Innovation and Growth: A Global Perspective, reveals that companies generating 80 percent of their revenue from new products consistently double their market capitalization in a five-year period. The researchers also note that a 10 percent increase in the proportion of turnover generated from products and services introduced in the same time frame leads to a 2.5 percent increase in revenue growth on a yearly basis.

Highlighting innovation's impact on the bottom line, the study points out that companies with annual total shareholder returns (TSR) in excess of percent and with consistent revenue growth during the previous five year average 61 percent of income from new products and services. Conversely, in organizations with shrinking revenues and a TSR averaging less than six percent, only 26 percent of income derives from new products and services. The majority of these "poor performers" also lose money on innovation projects, typically devoting most innovation-related funds to research and development. The "high performers" consistently report innovation profits by investing in a wide-range of areas such as processes, staff, and distribution.

"Poor-performing businesses rely on the 'next big thing,"' maintains Frank Milton, European performance improvement leader for PricewaterhouseCoopers. "If it doesn't arrive, they have little else in their portfolio from which to deliver value or revenue growth."

The survey of more than 800 companies in seven countries ranked technology as the top industry for implementing innovative, growth-generating practices. On average, 70 percent of the income in technology-based organizations stems from new products and services. The energy and banking industries follow at 50 and 45 percent, respectively. New products and services accounted for 21 percent of company turnover in the food and beverage industry-- the least innovative sector. "To be innovative in the 21st century, organizations must pursue at least 50 percent of turnover from products and services introduced within the last five years," says Milton.

Lack of innovation equates to depressed shareholder value in asset-intensive businesses such as materials processing, refining, and mining companies. According to research from Mercer Management Consulting, the processing industry fails to recognize opportunities for customer-driven innovation; as a result, share value isn't keeping pace with the overall market. "Companies need to identify and penetrate the most profitable customer segments with differentiated value offers based on the needs of their businesses," says Piers Whitehead, a vice president at Mercer. "Innovation will occur when companies learn to balance the push of production with the pull of the marketplace."

According to the PricewaterhouseCoopers survey, innovative practices consistently employed among successful companies include:

* Using external and internal venture capital to facilitate the realization of ideas in areas such as new product development.

* Adopting an open management style, whereby all employees are empowered to turn their ideas into action, rather than waiting on a bureaucratic set of decisions.

* Redefining the role of the corporate center from planning strategy and direction to fostering a climate where ideas spark action.

"For many companies, the greatest challenge remains creating an open style of managing innovation that encompasses the practices of the top performers," says Milton. However, more than 75 percent of those surveyed said that they believe this goal remains unreachable.

Copies of Innovation and Growth: A Global Perspective are available for $495.