Again, this isn’t terribly surprising, but it’s an important hypothesis to test because it demonstrates one of our core themes: Innovation and new technology are not the same thing. New technology may be a technical advance, but it’s not a real business innovation unless it drives significant new revenue streams. Consider the iPod. The true innovation was iTunes and the one-stop-shopping, ease-of-use business model. There was no significant technical advance. MP3 players had been out there for a few years; so had online purchasing and downloading of music. The real innovation was getting all those music catalogs under one roof and making them easily accessible by implementing established technologies in a simple, coherent way. Those were business model innovations that transformed the digital music industry.
In the third year we wanted to get a deeper understanding of different innovation strategies and the role of customer involvement. So we sat down with representatives of a subset of the Global Innovation 1000, companies that represented over US$68 billion of the Global Innovation 1000’s total $447 billion R&D spending. We wanted to get a better handle on three notions that arose in our discussions in the previous two years. The first is the relationship between innovation and business strategy. The second is that there are various innovation strategies out there and we want to know more. And the third is the role of the customer throughout the innovation process.
First, we found that the more tightly aligned innovation strategy is with business, the higher the performance in terms of operating income growth, shareholder return, and so forth. The lower the level of alignment, the lower the level of return.
Second, we found that across all industries, there are three fundamental innovation strategies, which we characterized as Need Seekers, Market Readers, and Technology Drivers. Interestingly, any of these strategies can be successful if they are well aligned to the business strategy.
Third, we found that the more companies depend on directly generated customer insight to design their innovation efforts, the higher the level of financial success. This was true across all three innovation strategies.
S+B: What findings most surprised you?
JARUZELSKI: I’m always surprised by how concentrated R&D activity is. The 1,000 companies in our study represent nearly 85 percent of all R&D activity in the private sector worldwide and over 50 percent of all R&D efforts public or private. So how well these companies innovate is really an important factor in the health of the global economy.
Another point is that while experience had taught us that how much a company spends is less important than how it spends that money, I was surprised at how stark our findings were.
And the third surprise is that although there’s a lot of hand-wringing over India, China, and other emerging economies, the lion’s share of innovation is still being performed by U.S. companies, western European companies, and Japanese companies.
S+B: Let’s focus a little bit more on this year’s findings. You talked about the innovation strategies. What did you find?
JARUZELSKI: As we looked into innovation strategies, companies fell into three distinct types. One we call Need Seekers, which are focused on understanding their customers’ needs deeply and being the first to market with innovation as a consequence of that deep understanding.
The second group is Market Readers, companies focused on monitoring not only their customers’ needs but also their competitors’ moves. Members of this group tend to be fast followers, taking an incremental approach to innovation. And as a result, although they don’t necessarily have better financial returns than the other two groups, they do spend a lot less on R&D than companies following either of the other two strategies.