What is the most important thing you can do to help your company grow over the long term?
The idle answers to this question are easy to imagine: “Oh, expand into new markets”; “offshore your manufacturing to China or India”; or “follow the money, seek investment, and invest it wisely”.
In fact, the evidence points overwhelmingly to a much more profound answer, which can be summed up in one word: innovate. Yes, innovate.
From the source’s mouth...
The evidence is indeed compelling and comes from many sources. The Intellectual Property Research Institute of Australia has conducted an annual survey of company innovation activity every year for the past decade. They found that among the top 50 research and development (R&D) spenders for whom five-year data was available, expenditure on R&D as a percentage of revenue was four times the national average. Most compellingly, though, their return on shareholders funds was 17.1% compared with 7.7% for Australia‟s top 1,000 enterprises.
There is further Australian data. For example, for its report on Public Support for Science and Innovation, the Productivity Commission surveyed the entire global literature on business investment and return from R&D. The evidence from numerous studies revealed that the gross returns for R&D (including „spillovers‟) averaged 165%. This figure is much higher than for other forms of private investment, including capital investment in physical plants and equipment.
A global story...
The story is the same globally. The Boston Consulting Group‟s 2007 Innovation Survey found that the 25 most innovative companies surveyed had a median annualised return of 14.3% from 1996-2005: a full 300 basis points higher than the S&P Global 1200 median. In the same vein, innovators increased median profit margins by 3.4% per year over ten years, compared with 0.4% for the median.
The Arthur D. Little innovation excellence study found a similar boost in profit margins, and top innovators achieved 2.5-times higher sales of new products. The IBM Global CEO survey shows a similar trend, with a historical excess in operating margin of 1.2% for product innovators and nearly 1.0% for business model innovators compared to their peers.
But if it‟s so simple, why did only one-third of Australian businesses report undertaking any innovation activities in a recent survey by the Australian Bureau of Statistics? Perhaps the others are secretly innovating without realising it or even knowing what innovation is. Perhaps they don‟t like reporting. Or perhaps they just have a death wish!
What, why and how
What does it mean? To "innovate‟ is to take a novel idea and apply it to successfully create something of value in the marketplace. For a product or service, innovation requires an inventive step, followed by commercialisation. Innovation may therefore not necessarily involve the creation of new technology; it may be the application of an existing technology to a new process or business model. It may not involve technology at all, although solid technology does underpin most well implemented processes and business models.
If the evidence convinces you that your business should be innovating, what's the single best thing you can do to begin? Place innovation as a standing item on the board agenda. That single step will give it the attention it deserves. Risk appears on the agenda at most board meetings - so why not innovation?
Too many Australian companies choose to populate their boards with individuals whose entire careers are focused on auditing and risk management, rather than innovation. This amounts to controlling or consuming wealth rather than creating it.
A risk worth taking
Innovation is the flip side of risk. Innovation is inherently risky, and many projects aimed at creating innovation will fail. Therefore, innovation needs to be balanced across the entire corporate spectrum, just as risk is. Like yin and yang, one is the counterpoint of the other. One creates growth, the other can stifle it. Both need to take their place at the top of the tree, and leaders need to champion both.
It is no longer sufficient to assume that because an organisation has ongoing product development reviewed by the board, the organisation has embraced innovation. Just as risk management should never be quarantined to a single project, nor should innovation be similarly constrained.
How are we doing?
Looked at systematically, innovation involves collaborations, both from within the organisation and outside. Organisations serious about innovation should ask themselves the following questions:
- Is innovation part of our business strategy?
- Do we have a culture in which ideas are accepted and listened to?
- Are suggestions from customers, staff, suppliers and partners recorded and considered?
- Is there a systematic approach to screen, evaluate, fund and develop the best ideas?
- Is there a „not invented here‟ culture that prevents collaboration and the diffusion of good ideas?
- Do we recognise and manage our intellectual property?
- Has our business ever worked with a research organisation?
- Are there key performance indicators around the number of high quality ideas generated, selected, funded, and released to market?
If some of the answers are no, perhaps you should demand more from your board.
Author: Dr Rowan Gilmore, CEO, Australian Institute for Commercialisation
Website: www.ausicom.com
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