The Six Ways High-Leverage Innovators Consistently Outperform the Competition

By | November 6, 2018

by Barry Jaruzelski

How are the world’s leading innovators able to out-smart and outperform their competitors year after year—and in a few cases, decade after decade?  The 2018 Global Innovation 1000 study, conducted by Strategy&, PwC’s strategy consulting group, looked back at 15 years’ worth of data on R&D spending trends and financial results, and found the answers in a very select group of companies that are able to consistently launch market-winning new products and services and beat their industry peers on seven key financial metrics—all the while spending their R&D dollars more efficiently. We call this very select group of leading companies high-leverage innovators.

Only 88 of the Global Innovation 1000 companies (the 1,000 publicly held companies that spend the most on research and development) qualified as high-leverage innovators for the five years ended 2017. Overall, their sales growth was 2.6 times as high as other companies and their growth in market capitalization 2.9 times as high, while their R&D intensity (R&D expenditures as a percentage of sales) was lower than their industry median. But the data also reveals a startling fact: The high-leverage innovators vastly outperformed other companies in the 2007–12 period, which spans the last major business downturn and the first years of the current expansion. They blew the doors off the competition in gross profit growth (which was 6.6 times as high as that of other companies), operating income growth (7.0 times as high), and total shareholder returns, which were 13.4 times those of the rest of the companies in the Global Innovation 1000.

These innovation superstars can be found in all regions and industries. They include household brands such as Apple, Adidas, and Stanley Black & Decker, as well as companies that may be less familiar to readers, like Amadeus IT Group, a global provider of travel solutions and software based in Spain, and DIC Corporation, a Japan-based specialty chemicals company. We also ran the analyses for the five-year periods ending in 2012 and 2007, and only two companies made the high-leverage innovator cut for the entire 15 years we observed: Apple and Stanley Black & Decker.

To gain further insights we surveyed a sample of leaders and managers—869 in all—to find where they are focusing their innovation efforts, how their innovation approaches are changing, what different innovation models they are pursuing, and how well they are succeeding. We separated out those companies that reported they were outperforming their competitors in terms of growth and profitability and noted how their innovation practices contrasted with those that reported growth similar to or slower than that of their peers.

Our analysis reveals that both the high-leverage innovators and the larger universe of companies that report relative high performance share six key characteristics. The first five are widely understood, though executed to varying degrees. The sixth is something that only leading innovators accomplish:

  1. They closely align innovation strategy with business strategy. More than three-quarters of respondents reporting that their companies were outperforming their industries said their innovation strategies were highly or closely aligned with their business strategies, compared with 54 percent of respondents who reported growth typical of their peers, and 32 percent of respondents who reported slower growth.
  2. They create company-wide cultural support for innovation. Seventy-one percent of respondents who reported that their company’s revenues were growing faster than competitors’ revenues said their corporate culture was highly or very aligned with their innovation strategy, compared with 53 percent of companies that reported the same growth as competitors, and 33 percent for companies that reported slower growth.
  3. Their top leadership is closely involved with the innovation program. Survey respondents reporting higher revenue growth than competitors were much more likely to say their company’s executive team was closely involved with the R&D program — 78 percent, compared with 62 percent for same-growth companies, and 53 percent for slower-growth companies.
  4. They base innovation on direct insights from end-users. All of our survey respondents — those who reported their growth as faster, slower, or the same as that of their peers — ranked consumer and client insights as the most important capability during the early stages of innovation. However, same- and slower-growth companies reported they are satisfied with their competence in this capability, while faster-growth companies seek further opportunities for improvement.
  5. They rigorously control project selection early in the innovation process. When asked which stage of the innovation process — ideation, project selection, product development, or commercialization — was most important, 35 percent of our survey respondents chose project selection, followed by 31 percent for ideation. However, 42 percent of companies reporting relatively faster growth said they saw project selection as the innovation stage with the most opportunity for improvement, compared with 30 percent of same-growth companies and 31 percent of slower-growth companies.
  6. They excel at each of these first five characteristics and have been able to integrate them to create unique customer experiences that can transform their market. Not long ago, companies that aimed for innovation excellence might have felt it was sufficient to be good at most of the five characteristics discussed above, and best-in-class at one or two. But the standard of innovation excellence has been rising as businesses have become more competitive in the 21st century — as the Global Innovation 1000 studies have shown for many years. Companies that aspire to the highest level of innovation leadership today need to excel at every aspect of innovation. And they need to make them converge in a way that pushes the boundaries of market expectations and transforms the customer experience.

What this kind of innovation excellence looks like in the marketplace is exemplified by the two companies that made the high-leverage innovator list across our entire 15-year performance window. One is Apple, which has thoroughly integrated an innovation mindset in the mission as well as the organization of the company, including its appointment of a chief design officer who has wide-ranging responsibilities—including new ideas and future initiatives­­—and who reports directly to the CEO. The other is Stanley Black & Decker. Long known as product innovation leader in its field, in 2017 Stanley launched a major new innovation push—driven by incoming CEO James M. Lorree—to become known as one of the world’s most innovative companies, creating 10 breakthrough innovation teams focused on developing new opportunities with the potential to deliver $ 100 million in annual revenues.

The consistent success of high-leverage innovators is a reminder that innovation success isn’t something that can be bought by simply spending more on R&D. Rather, it’s the result of painstaking attention to strategy, culture, executive involvement, customer insights, and execution throughout the stages of innovation—all with an eye toward crating differentiated experiences.

For further insights, see the 2018 Global Innovation 1000 study.

Forbes – Healthcare