Innovation is the world’s most valuable resource. It is more valuable than oil, gold or money. It is the single biggest thing that can turn around companies – and even countries.
If you have any doubt about this, look at what the world superpowers are fighting about now. It’s not oil, or even democracy. It is innovation.
With the U.S. economy still mired in one of the greatest recessions ever and over 10% of the workforce unemployed, President Obama’s State of the Union speech focused on innovation as our country’s top priority.
More telling are many of the Chinese government’s new initiatives (as reported by the Wall Street Journal last week) – designed to make China the world’s innovation leader by 2020. The new regulations essentially force foreign companies to transfer technology rights to the China if they wish to sell their products there.
Once those rights are transferred, Chinese companies are given the opportunity to “enhance original innovation” perform “co-innovation” or “re-innovation.” In other words, they’re allowed to rip it off. It is all part of the Chinese government’s 2020 plan to make their country the world leader in innovation.
Twenty years ago, a good, stable business was considered the most valuable asset a company could own. Companies that demonstrated consistent, stable earnings growth were the darlings of Wall Street. But the world has changed and innovation cycles are shorter than ever. Today it is easier than ever for a newcomer with a better idea to come along and trump that once-stable business. You may be on top today, but tomorrow’s another story.
“Playing it safe” and “focusing on the core” are the riskiest strategies today. If you are not constantly trying to reinvent your business, someone else will do it for you.
The Tale of Two Companies
Which stock would you rather own – Apple or IBM? The companies are in a similar business sector with equivalent margins. IBM is 50% larger at $100 billion in revenue vs. Apple’s $65 billion. However, Apple’s market cap is $322 billion, while IBM’s is just $204 billion – less than 65% of Apple’s.
IBM is a solid company with good management and a good long-term record of growth. But as we all know, Apple has been an innovation superstar. So Wall Street is essentially valuing Apple’s ability to generate future innovation at about $150 billion more than IBM’s innovation pipeline.
This is huge. And in most companies it is largely ignored.
We need to re-prioritize innovation
Most large companies put incredible effort into managing earnings. In most cases, growing your earnings by about 5% per year will keep your stock price ticking up by that amount; maybe even by a little more if you’re consistent about it.
But the capability for innovation – if you build it up and demonstrate you can consistently deliver on it – can take your stock price up 20%, 30%, maybe even 50%, without any increase in sales or earnings.
So why aren’t there more companies out there doing it? I believe the problem is a lack of commitment by corporate leadership.
Is your company committed to innovation?
Most companies give lip service to innovation, but they’re not really serious about doing it. If there were any other initiative that had the potential to increase shareholder value by 30-50% how would it be treated?
- First, you’d have a line manager leading the effort who reports directly to the CEO. It would not simply be a new title or second job for the VP of R&D. R&D is only a piece of the innovation puzzle. Successful innovation programs are run by general managers who have all functions at their disposal and resources and authority to develop, test and launch new products. Many innovation teams are handcuffed because they don’t have the ability to launch new products; everything has to be sold to other managers who are primarily rewarded for short-term business results.
- Second, it would be the top priority for funding, and the funding wouldn’t be taken away the minute there was a shortfall in one of the operating units. You can’t have a successful long-term initiative that is constantly starting and stopping. Unfortunately, this is the case in almost every company today when it comes to innovation.
- Third, you’d have aggressive objectives, a clear agreed-upon process for achieving them and frequent reports back to the CEO. The team would have the ability to develop, test and implement. They would also have responsibility for a budget and generating a return on their resources. The timeframe would be realistic over multiple years with clearly defined milestones. Many companies have parts of this, but they’re usually not the good parts.
So why aren’t companies doing this?
I believe most CEOs are uncomfortable with innovation because it is potentially risky and expensive and their company doesn’t have a good process for pursuing it.
As innovators, it is our job to help our leaders overcome these obstacles. We need to develop approaches that appropriately manage risk and cost, and create a consistent process for identifying and testing new opportunities. Most existing corporate innovation processes don’t do this. They are overly complex, time consuming and don’t generate good returns. We have alternate approaches in our GameChanger Manifestothat we recommend.
Has anyone in packaged goods done this well?
Believe it or not there is a supermarket chain – Safeway – that stands out. With an engaged CEO, a dedicated innovation team with authority, consistent funding and objectives, they launched O Organics, a successful line of organic foods which Safeway is also selling to other retailers. They also launched the Blackhawk Network Gift Card business. These are the gift card kiosks you see now in almost every supermarket or drugstore with $25 or $50 cards for Starbucks, Borders, Macy’s and hundreds of other retailers. Blackhawk Gift Cards are now distributed in 46 of the top 50 supermarket chains, and the business generates over $1 billion in annual revenue for Safeway.
Unfortunately, Safeway is in a tough industry with a poorly differentiated core product (groceries), so it hasn’t yet reaped great rewards from Wall Street for its innovations.
But if a grocery chain can pull this off, we’re confident that every major CPG company can and should be doing this. And if you don’t, not only are you missing a huge opportunity but you’re leaving yourself vulnerable to competitors who will do it.
We’re going to be hearing a lot more about innovation in the next several years. It is something that can revitalize our companies and our entire nation. But the only way for us to get there is for all of us to encourage and support our corporate leaders to take this on, and make it a priority.