The Coherent Innovator
Companies that develop the relatively cohesive set of innovation capabilities we have outlined, and then combine them with similarly distinctive firm-wide capabilities — thus aligning their innovation strategy with the overall corporate strategy — can be said to be coherent. They gain what we call a “coherence premium,” which is manifested in their ability to outperform their rivals. By comparing the financial results of highly coherent companies in the Global Innovation 1000 to their less-coherent rivals, we found that, when normalized, the profit margins of companies ranked in the top third in terms of coherence were 22 percent higher, on average, than those of companies in the bottom two-thirds, and that the coherent companies achieved 18 percent greater market capitalization growth as well. (See Exhibit 13.) In general, the more coherent a company is, the more competitive success it will have — and the more it will be able to generate the higher margins that result from being truly differentiated.
Why are strong margins associated with higher coherence? Optimizing the proper set of capabilities allows companies to focus on what matters most, and not spread effort and resources across a wide range of capabilities that are less critical. More specifically, companies that focus on critical capabilities aligned with overall strategy tend to innovate more effectively and bring their innovations to market more efficiently, boosting top-line growth while reducing relative costs. Regarding market cap growth, as companies gain the differentiating capabilities that give them coherence, their built-in advantage enables them to improve earnings growth, a key metric that the stock market takes into account when pricing a company’s shares.
Apple is the classic example: In the early 1990s, the company squandered enormous resources and billions of dollars on a series of failed products like printers, scanners, and the Newton PDA. Its efforts to do everything itself, building capabilities as varied as cutting-edge hardware development and volume manufacturing, led to huge losses and massive layoffs. But once Steve Jobs returned as chairman and CEO in 1997, Apple began to focus its portfolio and its capabilities. The company has since concentrated very selectively on what it does well, and what really differentiates it from its peers: deep understanding of end-users, a high-touch consumer experience, intuitive user interfaces, sleek product design, and iconic branding. For example, Apple narrowed its product line and began leveraging the Apple brand through its Apple Store retail strategy.
The results speak for themselves. Apple’s profitability and market cap are well above the industry average, and this year our survey respondents voted it far and away the most innovative company — all of which it achieved while consistently spending far less on R&D as a percentage of sales than the median company in the computing and electronics sector.
Innovators and Strategists
The virtue of thinking about innovation in terms of capabilities and the capabilities systems that enable companies to be coherent is that it provides a specific way of talking about what companies need to focus on to translate their innovation efforts into sustained success. The job of innovation leaders — and of corporate strategists — isn’t only to choose which capabilities to pursue. It’s just as often to decide which ones don’t matter as much in achieving superior performance. As Xerox’s Steve Hoover puts it, “If a certain competency has nothing to do with how you’re positioning yourself in your market and creating value for your customers, then don’t oversupply it. Put your energy elsewhere, where you are going to differentiate.”
Companies, by focusing on the capabilities they believe are critical differentiating factors in their efforts to conceive of, develop, and sell their product in their particular markets — on what they need to do better than competitors — can gain the coherence necessary to outperform. And that, of course, is what innovation — and corporate strategy — is really all about.