The DNA of the World’s Most Innovative Companies
Innovation makes millionaires and
undermines monopolies. It raises the profitability of companies and puts a
premium on the shares of the most successful. But how can companies foster it?
New research sheds light on the innovation process and how firms can tap into
it to raise their performance and their share price.
Innovative business leaders
typically share certain qualities. They are always asking questions,
experimenting, observing and networking. While building on past successes, they
keep the doors open to future innovation.
In a world where success often
breeds more success, such behaviour can boost the market value of their
companies well beyond what current profitability would justify. In a newly
published study of what makes a successful innovator, “we looked at people who
lead incredibly innovative companies”, says Hal Gregersen, INSEAD Senior Affiliate Professor of Leadership and Director
of the Learning to Lead executive education programme and one of the study’s
co-authors. “And we realised that these companies seemed to be incredibly
valuable.”
In reaching this realisation,
Gregersen and his co-authors, Jeffrey H. Dyer of Brigham Young University and
Clayton Christensen of Harvard Business School, had hit on what they call the
“innovation premium”. And in their book, “The Innovator’s DNA”, they explain
how for some of the world’s most innovative companies it can add 50 percent or
more to their market value.
“Investors pay a stock price based upon two
things,” says Gregersen. “One is the cash flow - the money coming from existing
products, services and markets. The other is the belief that the company will
develop new markets, new services and new products tomorrow.”
More
jam tomorrow
Take a company like Amazon. Given
its reputation, suggests Gregersen, an investor might well say: “I’ll pay you
this amount for your stock for the existing products and services, and for the
markets that you’re in. But I also believe you will do something different in
the future. You’ll have new markets. You’ll have new services. You’ll have new
products you don’t even have today - and because of that, I’ll pay you a premium.”
Building on this insight, Gregersen
and his co-authors worked with HOLT, a unit of Credit Suisse Group, to draw up
an innovation premium roll-call of innovative companies based on analysis of
the relationship between their cash flow and their share price. To qualify,
companies had to be listed on a stock exchange and have a market capitalisation
of at least US$10 billion. They also had to have published financial statements
over at least the past seven years.
The results were striking. Companies
like Toyota, Sony and Samsung, which frequently feature on other lists of
innovative companies, sank to negative ratings. In their place emerged a number
of unexpected and relatively unknown companies - firms like California-based
Intuitive Surgical, which builds systems for robotically assisted, minimally
invasive surgery, Natura Cosméticos, a Brazilian manufacturer of cosmetics made
from plants from the Amazon forest, and Keyence Corporation, a Japanese
producer of electronic sensors for automated factory systems.
Cut-throat
car market
The list includes household names
like Amazon, Apple and Google. But what makes it different from other similar
lists is that it ranks firms not just by past achievements but by what
investors expect going forward. “Our list is future-looking, forward-looking
and it’s based on past performance predicting the future,” Gregersen explains.
“These are organisations that systematically, over at least a five-year period,
have generated this kind of premium. Investors bet with their wallets: this
company is innovative, not only now but in the future.”
Common to all companies on the list
is the fact that their share prices are 25 percent or more above what would be
justified by cash flow alone. The leader is cloud computing company Salesforce.com,
with its AppExchange that offers more than 1,000 applications for businesses,
and which recently launched Chatter draws on features of Facebook and Twitter
to provide social software for enterprise collaboration. Market expectations
for further innovations have given it a premium based on 2010 results of no
less than 75 percent. Bringing up the rear, PepsiCo scrapes in at number 50,
with a premium of 25.45 percent. Companies like Toyota and BMW, by contrast,
despite their known capabilities for innovation are nowhere to be seen. That,
says Gregersen, is because investors expect them to find it hard to earn
dividends from new innovations in the face of tough competition from Chinese
manufacturers in today’s cutthroat car market.
Think
different, behave different
So how do companies develop the
innovative qualities that enable such results? “There are three elements to
this,” says Gregersen. “The people in the company, the processes they have and
the philosophies they have.” The essence of the innovator, he adds, is that he
or she not only thinks differently from other people, but also behaves
differently.
Take Steve Jobs, the founder of
Apple. “If we walked into his world and followed him for a day, we could see
him behaving in ways that will generate new ideas. He lives the Innovator’s DNA
skills. He observes the world really carefully. He talks to all different kinds
of people. He’s more than willing to engage in different kinds of experiments,
constantly peppering the world and the people around him with questions that
provoke people and challenge the status quo.”
Or take Mike Lazaridis, founder and
co-CEO of Research in Motion, the firm that gave the world the BlackBerry, or
Scott Cook, the founder of Intuit. They, too, are always asking questions and
looking out for the unexpected: “Why not this? Why couldn’t we do that? What’s
going on here? How could we do this better?” When someone “behaves that way,
acts differently, asks lots of questions, observes like an anthropologist,
experiments constantly, networks for new ideas,” Gregersen observes, “they’re
likely to get incredibly insightful ideas about new businesses, new products,
new services, breakthrough processes: things that will make a difference for
any company or country.”
Down
on the farm
That’s something most companies in
today’s environment would pay dearly for. And the good news for those who
really want to innovate is that, given the right environment, innovation can be
within the reach of anyone.
“About 25 to 30 percent of our
innovation capacity is a genetic component, it’s our DNA,” says Gregersen. “But
that’s one-third of the equation. The other two-thirds is the world we live in.
It’s fascinating when we interview these famous entrepreneurs to realise that
they grew up in worlds where adults paid attention to these innovation skills.”
Most often these adults were parents and grandparents, but in about one-third
of the cases they were master teachers at Montessori or Montessori-like
schools.”
To show how curiosity and
willingness to experiment can be nurtured, he cites the founder of Amazon, Jeff
Bezos, and the chair of Bain & Company, Orit Gadiesh. “Bezos had
grandparents who taught him and reinforced to him that experimentation matters.
He lived on a farm with them in the summertime and when things broke down, they
fixed the things that broke down. They learned that when you try and experiment
you can figure out a solution.”
As for Gadiesh, “She grew up in a
family where questioning was everything and it was reinforced to her that she
question. So they both not only had some genetics around these skills, but they
grew up in a world that said ‘keep them, pay attention to them, use them, do
something with them’. And then when they became adults they actually went out
and did something with them.”
Everybody’s
job
What lessons does Gregersen draw for
other firms that want a piece of this innovation bonanza? Firstly, innovation
starts at the top. “Companies on this list are led by leaders who spend at
least a day more a week than a non-innovative CEO doing these innovation
skills: asking provocative questions, going out there and making real
observations and not relying on second-hand data.”
Secondly, innovation must be allowed
to permeate every level of the company. In a truly innovative company,
innovation has to be everybody’s job. “It’s just part of what you do when you
walk in through the door today when you come to work. You need to figure out a
better way, a more innovative process, a better product, better service.”
Finally, however, a warning:
innovation can be disruptive, and in a company with no innovation philosophy,
it’s likely to be unwelcome. In this case, says Gregersen, a would-be innovator
faces a Catch 22 situation. “If I’m in a company that’s not innovative and I
just do what they ask me to do, I’ve sealed my fate to not have a future. If I
start engaging these skills, on the other hand, I may get a lot of pushback and
irritation, and I may even get fired.”
In such a worst case scenario, he
concludes, it’s time to use these skills in a more receptive environment, so as
to “create a future that otherwise won’t be there”.
By Nicholas Bray |
http://knowledge.insead.edu/innovation/the-dna-of-the-worlds-most-innovative-companies-
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