Who Are the World's Most Innovative Businesses?
A Popularity Contest?
Ask most people to tick off their list of who they believe are ‘the world's most innovative businesses’, and you're likely to get something along these lines: Apple, Google, Amazon, Nike, GE, and so on.
All of these are certainly high verve businesses with incredibly well known brands. But at the end of the day, these are subjective perceptions based purely on top–of–mind recall and lasting impressions… a sort of popularity contest if you will.
Not that such impressions aren't important… they're very important for the purposes of brand equity, but… is brand equity an indicator of innovativeness? That's the real question here.
Bring In The Lists
There are, in fact, several institutions who over the years have sought to compile an annual list of ‘the world's most innovative companies’.
Our team has cross-referenced four of the most important of these — those from Fast Company, Boston Consulting Group (BCG), Forbes, and Thomson Innovation. The first two take a somewhat subjective look at the topic. The latter two attempt to take a completely objective look at it.
Fast Company uses their own (undisclosed) proprietary methodology to come up with a list of what are probably the businesses most changing the world at any given time. They get this list (which we like). BCG attempts to capture perceptions from inside industry, by surveying business executives about how they perceive their own organization, and who they perceive to be the most innovative businesses. From that survey, they get this list of perceptions.
In contrast, Forbes and Thomson attempt to take an entirely objective look at who are the most innovative businesses in the world. The problem, however, is that even when they attempt to be objective, they still get very different answers from each other. Ask Forbes who they think are the 100 most innovative businesses in the world, and you'll get this list. Ask Thomson Innovation this exact same question, and you'll get this list. (It would appear that 2015 was the last year Thomson tried their hand at this – their fifth year of doing it). Now compare these two lists. What you'll notice if you look close enough is that not a single business shows up on both lists! We have 200 business organizations here, and all 200 are, indeed, very innovative in their own right, but not a single one is considered to be amongst the most innovative businesses by both of these parties.
Why Such ‘Disagreement’?
So why the disagreement? Why do Fast Company, Boston Consulting Group, Forbes, and Thomson Innovation all come up with such different answers?
It happens because these four parties have all taken very different views on how to define what ‘innovative’ means.
In the case of Forbes, they're using a methodology called the Innovation Premium developed by Jeff Dyer and Hal Gregersen, authors of The Innovator's DNA. The Innovation Premium is based on financial investment figures… literally the difference between the business' market capitalization and a net present value of cash flows from existing lines of business — this difference being the bonus given by Equity Investors on the educated hunch that the business will continue coming up with profitable new growth (thus the premium gets built into the stock price). This method is, admittedly, very speculative and has not born a correlation to subsequent investor returns. The price of entry here is seven years of public financial data and a minimum market cap of 10B USD, with industries excluded that have no major investments in R&D (thus omitting most service–oriented industries and commodity–based industries like energy and mining).
In the case of Thomson Innovation, their methodology is based purely on intellectual property activity. More specifically, their algorithm looks at the volume of ‘innovation patents’ a business is generating, their level of success in getting those granted, their reach globally to the patent agencies of different countries (the theory being that the more valuable a business considers an invention, the more broadly it will try to protect it), and the influence their patent portfolio is having (as indicated by its being referenced in other patent applications). In other words… not only is the quantity (size) of the patent portfolio important, the quality of the portfolio is also important. The price of entry here is 100 or more ‘innovation patents’ from the most recent five years.
So both Forbes and Thomson have highly technical algorithms with undoubtedly some incredible level of precision behind them. But because they're looking at two very different things, they arrive at two very different answers. This dichotomy reflects a very real ‘shades of grey’ problem the innovation industry has — namely how to define ‘innovation effectiveness’. In this case, one party is asking the Investors and the other is asking the Technologists, and those are simply two very different views of innovation — neither necessarily right nor wrong, just different. Likewise, BCG is asking Executives and Fast Company is asking consumers (and indirectly, Marketers). They're all going to get very different answers.
By the same token, we can suppose that if we were to ask the fine folks at CB Insights about their list of the “100 most innovative businesses in the world” (they haven't posted one yet), we would likely get a very different answer yet again, given that what they are looking at is activity in the startup, angel investing, and venture capital worlds. Certainly their set of ‘rose colored glasses’ would be different yet from any of these others.
Okay… So Who's Right?
This leaves us hanging and wondering… whose list is right? Which set of lenses should we wear? This is a widespread and universal problem… that of trying to measure ‘innovativeness’ and ‘innovation effectiveness’. Many have taken a stab at it.
In the whitepaper “Innovation Metrics: Measurement to Insight” prepared for the U.S. National Innovation Initiative (now somewhat dated), Egils Milbergs and Nicholas Vonortas lay out ‘first generation’ indicators, which were primarily about innovation inputs, ‘second generation’ indicators, which were about intermediate outputs, ‘third generation’ indicators, which were based on the quantitative study of publicly available benchmarking data, and ‘fourth generation’ indicators, which recognized the value of intangible assets such as knowledge holdings, business networks, and innovation ecosystems that foster and support innovation. They point out that as we move from first to fourth generation indicators, we move further away from an industrial economy viewpoint and more toward a knowledge economy viewpoint. In their system, patent activity was considered a second generation indicator… not something to be relied upon as a good indicator of real innovation. And they were right… patent activity by itself is an antiquated method that should be ignored. However, patent activity and patent portfolio valuation are two very different things, though both deal with one's intellectual property; portfolio valuation falls under Milbergs' and Vonortas' fourth generation indicators.
This is precisely why Thomson attempts to characterize the quality of the patent portfolio — they use its quality as a surrogate for its potential valuation.
And indeed… there continues to be very strong sentiment around — and growing awareness of — the real financial value of intangible assets like IP holdings. In an incredibly excellent survey of the world of innovation entitled “What Innovation Is” (2005), Howard Smith, Chief Technology Officer in CSC's European Group, pointed out that at that time pharmaceutical giant Pfizer had a market cap of $270B while holding only $20B worth of tangible assets like machinery, land, and buildings, the difference being made up by the intangible assets it held in the form of drug patents behind such market-leading drugs as Zoloft, Zyrtec, and Norvasc. The same is true too of most software firms… their intellectual property assets (including informal tribal knowledge) are a major constituent of their total valuation; their real property assets account for very little of it.
This being the case, one might expect a correlation between the Forbes and Thomson models, such that the lack of correlation must lead us to believe that Investor sentiment is tied more to anticipated future market activity (i.e., real product commercialization) than to the intellectual property underpinning it, or that Thomson's early assessment of portfolio quality does not always mature into actual portfolio valuation. We'll leave that for the Investment Analysts to debate.
Ultimately, innovation effectiveness has to measure actual, real value delivered to the marketplace (customers) and the innovation–driven growth that happens inside of businesses as a result of that. By this standard, both of these objective attempts are in fact poor surrogates. Businesses that generate a substantial volume of intellectual property, even high quality intellectual property, but fail to convert this into tangible commercial products and services cannot be called truly ‘effective innovators’ (though they could be called great inventors). Likewise, Investors jacking up the valuation of a business just because they feel warm and fuzzy about it is a highly speculative undertaking and is based on the whims of a group of people who are potentially operating under a herd mentality. We're fairly certain that back in 1999 many Investors thought Enron was an incredibly ‘innovative business’ and its valuation was affected by that sentiment. But was that valuation real, and did that sentiment really make it ‘innovative’? In that same year, just before the bubble burst, the same could also be said about many of the young dot-com businesses. So Investor sentiment is not the right measure either.
So why then, if both are such poor indicators, do Forbes and Thomson use these metrics (aside from selling ads or research reports)? The reason is mostly because the information they are based on is publicly available information and is (more or less) market agnostic, meaning it can be applied across all industry sectors, allowing for the direct comparison between business organizations across nearly every industry and market. But neither is a direct measure of ‘innovation effectiveness’; both are indirect measures. A direct, objective measure of innovation effectiveness that is publicly available does not exist (at least yet).
Direct measures do exist however inside of businesses (where they tend to remain locked up) and have been in widespread use for years now. Here, businesses track metrics that are direct measures of accelerated value delivery, and these tend to be analyzed at a very high level of granularity — market by market, category by category, and product by product. Among others, these includes such measures as:
- Product Vitality — Percent annual revenue growth attributed to offerings launched or new business models implemented over the past N months.
- Relative Growth Acceleration — The difference between one's own market share growth and the growth of their overall market. This indicates additional uptake… acceleration over the baseline market velocity. This metric is not fully reliable because it may improve on account of a major competitor moving backward (product recalls / quality & delivery issues / bad user reviews / etc.), or solely because one's sales force was amped up, rather than because the organization experienced true innovation-driven growth.
- Public Perception — Customer surveys on perceptions of how ‘innovative’ the business is (in theory, this should bear some correlation to the above metrics).
A Universal Metric… ?
We propose that the solution to this dilemma is for industry to come together and define a uniform set of metrics for innovation effectiveness (or innovation-driven business growth) that can be applied — and reported — consistently across every business organization in every industry and every market — including those omitted by both Forbes and Thomson (for example, an energy company that leverages trade secrets to deliver significantly greater value to the market than any other energy company, thereby achieving substantial market share and revenues).
We would give these metrics a formal name such as ‘The Universal Measures of Value Growth Acceleration (UMVGA)’, so that Politicians, Economists, Academicians, and Investors would all find them compelling and encourage businesses to use them (the rest of us can just call them ‘innovativeness’). These measures would reflect the new value that markets perceive they are receiving from a business in a given time period, as voted for in their spending dollars.
With such a tool in hand, businesses who wish to be thought of as ‘leading innovators’ could then compile their numbers and report them alongside their other statistics, such as those associated with CSR. These measures — representing the true capitalization of accelerated value delivery — could then be used as the basis for a fair and objective apples–to–apples comparison between all business organizations. Then the world would really know who its ‘100 most innovative businesses’ really are.
In The Meantime
In the meantime, how can we use what is out there?
It would be interesting to look at the next 200 businesses on both Forbes' and Thomson's lists. From those lists, we suspect that we can find a few business organizations who show up on both lists.
In fact we did cross-reference what was published in a prior version of these four lists (from 2015) and from that we did identify 19 businesses that showed up in at least two of the lists, and 5 businesses that showed up in three of the four lists.
Who were those five businesses? They were Amazon, Apple, GE, Google, and Nike.
Maybe these really are the most innovative organizations in the world. And maybe those subjective brand perceptions we started with — the ‘popularity contests’ — really do count for something after all.
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