The 10 Most Innovative Companies
For the third year in a row, we asked our survey participants to name the companies they thought were the world’s most innovative. This year, Apple didn’t just top the rankings (as it did the past two years); it increased its lead substantially. The company — which in August 2012 became the most valuable in history, measured by market capitalization — was named by almost 80 percent of respondents as one of the three most innovative companies in the world, up from 70 percent last year. Google held steady at number two; 43 percent of respondents included it among the top three, essentially unchanged from last year. 3M also maintained its position of high regard among respondents. It may not make headlines often, but the company again took third place, capturing the votes of just more than 15 percent of respondents. (See Exhibit F.)
Apple’s unchallenged position comes in a year marked by the death of the company’s founder and chairman, Steve Jobs, and by the absence of any truly new product introductions. Although the company’s absolute spending on R&D over the past three years has nearly doubled, to US$2.4 billion, it still spends just 2.2 percent of its sales on its innovation efforts, well below the average of 6.5 percent for the computing and electronics sector. And despite being one of the 2011 industry sales leaders in 2011, with $108 billion in revenue, Apple’s absolute R&D spend ranks only 16th within its industry and 53rd overall within the Global Innovation 1000. In contrast, Apple’s longtime rival Microsoft was the top spender in the software and Internet sector, and was ranked by respondents as the sixth most innovative company.
Last year’s sole newcomer to the list was Facebook. But that was back when the company was still rapidly growing its user base, and before its ill-fated initial public offering. The bloom may be off the rose for this erstwhile social media darling. Amazon has replaced Facebook in the number 10 position on the most innovative list. It’s about time that the online retailer appeared; although Amazon makes few products of its own, it consistently develops innovative retail strategies and services. The Kindle was the first breakthrough e-reader, but what made it truly innovative was Amazon’s decision to link it so tightly to its e-book business, effectively cutting out the competition. And Amazon’s foray into cloud computing, despite a few setbacks, continues to attract customers and increase revenues.
The 10 most innovative companies handily outperformed the top 10 spenders on R&D on several financial metrics — market cap growth, revenue growth, and earnings as a percentage of revenues (after normalizing for industry variations). (See Exhibit G.) Indeed, this year’s top 10 spenders actually underperformed in terms of both market cap and revenue growth, compared with their industry peers. And were it not for new entrant Amazon’s slim margins, the top innovators would have vastly outperformed their peers on earnings as a percentage of revenues. This only confirms our long-standing finding that a company’s financial performance and innovativeness do not correlate with how much it spends on R&D, but rather with how well it executes its innovation strategy.
—B.J., J.L., and R.H.
Today we think of innovation as what happens in Silicon Valley, where the young and ambitious create clever new businesses based on the latest Internet technologies. But this model is actually quite recent. For much of the 20th century, innovation was virtually synonymous with Bell Telephone Laboratories, the AT&T research subsidiary where many of the technologies on which our world depends were pioneered. Jon Gertner recently published a fascinating history of the institution, called The Idea Factory: Bell Labs and the Great Age of American Innovation (Penguin Press, 2012). He spoke with strategy+business in September 2012 about the way Bell Labs fostered the generation of ideas, and the role it played in AT&T’s commercial success. The two were aligned around a coherent business system and innovation strategy, creating the greatest Technology Driver of its time.
S+B: What was the genesis of Bell Labs’ research agenda?
GERTNER: It was essentially a business decision. AT&T knew that, in order to run a complex business like telecommunications, which had to continually improve in quality and reduce costs, research would be an essential component. So for them, R&D was a huge money-saving, profitable endeavor, and a path to a sustainable business, if done correctly.
The people running the labs in the early years were scientists: Putting dollars into research was something that made enormous sense to them. The idea that you could create a technology that would save hundreds of millions of dollars on phone service was very much in the minds of some of these researchers and engineers.
S+B: Yet now we think of Bell Labs as almost purely a research organization.
GERTNER: Yes, but there was a business rationale, too. The people who ran the labs thought deeply about what would happen if telephone traffic or switching grew increasingly complex, and they regularly asked, “Do we have the capacity or ability to handle that?” It was essential to AT&T’s survival to keep looking ahead at broad technological trends, knowing that they would need something as disruptive as the transistor to continue to manage the system’s complexity. So was the transistor a basic research endeavor or an applied research effort? It’s hard to say. What was crucial was the fact that Bell Labs was connected to the phone company, and it was understood that the phone company would have a never-ending stream of problems, both technological and economic, that needed solving.
In a way, this is what successful companies still do. They look ahead and say, “What happens when we can’t make transistors and silicon chips any smaller or they’re using so much energy that it becomes incredibly burdensome for companies to pay for them?”
S+B: We often view competition as a critical component of innovation. What does the Bell Labs story tell us about that notion?
GERTNER: There’s no doubt that incremental innovation is stimulated by competition, as companies vie to win in the marketplace. Is disruptive innovation stimulated by competition? Sometimes. But, generally, the idea that the big leaps in science and technology come from competition is misplaced, and I think history shows us that. Instead, I think they usually come from curious scientists and technologists working in a creative atmosphere with a rich exchange of ideas, often with an understanding that what their work is doing will have practical applications. Even in a pre-cubicle culture, all doors were open at Bell Labs.