The Most Innovative Companies 2013

The Most Innovative Companies 2013

          
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The Most Innovative Companies 2013

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    Five Sources of Innovation Strength

    From Lockheed’s legendary Skunk Works to the garages of Silicon Valley to far more structured corporate programs and processes, innovation takes many forms and follows myriad paths. There’s no one right way to “do innovation,” of course, but based on our 50 years of working with all manner of clients, and our surveys of companies in more than 15 sectors and more than 20 countries conducted over nearly a decade, we have identified five key attributes that separate strong innovators from their weaker counterparts:

    • Their top management is committed to innovation as a competitive advantage.
    • They leverage their IP.
    • They manage a portfolio of innovative initiatives.
    • They have a strong customer focus.
    • They insist on strong processes, which lead to strong performance.

    These are not individual drivers of success; they are interconnected and reciprocally reinforcing. Strong companies often possess all five.

    Leadership Commitment

    As is the case with so many other aspects of corporate performance, the commitment of top management has a lot to do with a company’s innovation track record. Nine out of ten respondents identifying their companies as strong innovators reported that top management is committed to innovation, compared with less than half as many at weak innovators. Almost half of respondents at strong innovators cited the chairman or CEO as the driving force behind the company’s innovative efforts. Four out of five ranked innovation higher than other strategic priorities.

    The role of leadership at Samsung under Chairman Kun-Hee Lee has long been legendary in its home market. This reputation has become global in recent years as the company has moved from innovative success to success—in flat-screen technology, smart devices, and, most recently, health care. Samsung has vaulted up the rankings in our survey, from number 26 in 2008 to second place this year.

    Samsung thrives on innovation, and top management is responsible for the philosophy behind a culture and approach that nurture bold ideas and executes big technological advances. Perhaps the best-known example is the company’s “new management initiative,” declared in 1993, which became the catalyst for Samsung’s explosive growth as a leading global innovator in electronics and information technology. The initiative brought about fundamental changes in corporate culture, systems, and practices—shifting the focus from quantity and cost-driven goals to product quality, design, and R&D. Under the battle cry “Change everything except your wife and children,” it called for extensive investment in research, the nurturing of globally minded talent, and the introduction of an efficient, global management system. These programs led to product innovations inspired by both technology leadership and global perspectives from Samsung’s global networks.

    One of the fundamental drivers of Samsung’s innovation efforts is its leadership’s relentless pursuit of change and new growth opportunities. Management instills a culture of not accepting the status quo and not being afraid to change. Samsung’s leadership is known for recognizing products that can drive the creation of whole new markets—flat screens and smartphones are two examples—and investing heavily in their development. Samsung’s popular Galaxy Note mobile device came into being as the company sought to combine the portability of a mobile phone with the broader usability of a tablet. This led to the creation of a new mobile-device product category dubbed “phablet,” and it helped Samsung become the number-one maker of mobile phones globally.

    Under its Vision 2020 initiative, which was announced in 2009, the company is now building on its established strength in technology and investing in “life care” businesses—such as medical devices and energy-saving LED technology—that focus on health and the environment. At the same time, it is continuing innovations in other advanced-technology areas, such as “green memory” solutions that seek to increase computing performance while reducing power consumption.

    Leveraging IP

    The recent avalanche of high-profile patent cases, mainly in the technology and telecommunications sector, has made it clear that innovation depends, in part, on owning the idea. Protecting IP rights—that is, maintaining exclusive ownership of a product or process—has long been a defensive strategy, but smart companies are increasingly using IP as a means of establishing competitive advantage in the marketplace. Some companies have built substantial businesses on the basis of licensing their IP to others. (See “Six Habits of IP Winners.”)

    IBM is a notable example. The 102-year-old technology company has been a constant presence among the ten most innovative companies in every BCG survey going back to 2005. The company reports that it has topped the ranks of U.S. patent recipients for 20 years straight, with 6,478 in 2012 and nearly 67,000 in the past decade. IBM actively manages (and prunes) its portfolio as the value of individual patents fluctuates over time. According to one study, by 2012, the company had abandoned nearly 40 percent of the patents it received in 2007.

    In IBM’s view, innovation, growth, and valuable patents are intertwined. The importance of IP to its business comes from the top. Many of the patent lawyers in its extensive global network have technical, as well as legal, backgrounds. They are involved in R&D projects from the beginning, which means that IP considerations are reflected throughout. The company has built an IP organization with key functions embedded at both the center and in individual businesses to ensure that strategy and priorities are aligned across the organization.

    One result of this focus on and commitment to IP is a substantial and growing revenue stream from selling and licensing IP. Revenues, which have been increasing at about 6 percent per year, reached $575 million in 2012, not counting an additional $500 million in income from custom development. 

    It’s not surprising that strong innovators such as IBM are more than twice as likely as their weaker counterparts to consider IP criteria when deciding which new product ideas to push forward. They also believe, likewise by margins of two to one, that their companies are effective at developing, protecting, and leveraging IP, and they are more likely to use IP as a source of competitive advantage.

    Managing the Portfolio

    In a world of limited resources, effective innovators learn how to devote resources, cut losses, and keep a pipeline of high-potential ideas moving forward. Strong performers are distinctly better at managing portfolios of projects in development and products in the marketplace. (See Exhibit 7.) They define clear priorities, and they have processes in place to stop projects when their promise wanes. These companies are also focused on the future; long-term advantage is a primary goal of innovation for them. They actively manage the mix of incremental innovations and more radical, “new to the world” products, platforms, technologies, and services.

    exhibit

    BMW, which moved up five places to number nine in the 2013 survey, has long followed a sophisticated strategy of portfolio management and innovation. A Munich-based team manages the innovation portfolio, tracking each idea from generation through completed project and monitoring the results. With three distinctive brands in its stable—Rolls Royce, Mini, and the namesake BMW, plus multiple individual models (3 Series, 5 Series, and so on)—the company plans years ahead to keep each of its various marques on the cutting edge.

    BMW uses its portfolio lens to apply ideas and insights in ways that are consistent with each brand’s positioning and customer appeal, and it employs new technologies to substantiate brand promise and ensure differentiation. The company also follows a strategy of keeping its products in the introduction and growth stages by bringing out new models in each product line before the cars currently in the market reach the point of maturity or decline.

    In the past few years, BMW has been adding sustainability as a core element, with the goal of establishing the BMW brand as the “ultimate driving machine” among environmentally friendly vehicles. True to its portfolio-strategy approach, the company has embarked on a multiyear campaign that includes, among other things, new mobility concepts and the use of technologies to emphasize strategic differentiation—ensuring, for example, that BMW vehicles have the lowest carbon dioxide footprint among premium competitors. Innovations such as brake energy recuperation by the alternator and a fuel-saving automatic stop-start function further underscore commitment to the concept. BMW developed a comprehensive, from-the-ground-up concept for the new i3—the first car in its electric “i” line—that is fully dedicated to the needs of an electric vehicle. The new design includes a carbon fiber body structure, with the battery positioned beneath the driver and passengers, and it uses a host of sustainable materials in the interior to give the car a completely different feel from the company’s other models. 

    Focusing on the Customer

    For Procter & Gamble, the customer is the consumer. P&G, which jumped 26 places to number 23 in the 2013 survey, invests heavily in foundational consumer research, conducting some 20,000 studies involving more than 5 million consumers in nearly 100 countries. The company believes that innovation requires both creativity and collaboration. It has built innovation centers that provide simulated in-home and in-store environments. At these centers, P&G teams can interact with consumers and retail customers for days or even weeks at a time.

    The same is true in other industries: innovation should not take place in a vacuum. Strong innovators involve customers in their idea-development processes and decisions, a method that has at least three big benefits. It helps ensure demand for the company’s innovations when they hit the market. It keeps them close to their customers. And it helps avoid the costly overspecifying or overengineering of products beyond what customers need and are willing to pay. More than 70 percent of strong innovators say that key customer views play a critical role in selecting ideas for development, compared with only 42 percent of weaker performers. Almost 60 percent use customer satisfaction to measure innovation success, compared with 41 percent of weaker innovators. 

    Customer feedback is part of new-product development at more than three-quarters of strong innovators but at only about one-third of weaker performers. Smart innovators seek customer input at key points in the product development process; they also steer clear of open-ended feedback, locking in the product specs at a designated point and moving forward with the development process. (See “Integrating Customer Input in New-Product Design.”)

    Integrating Customer Input in New-Product Design

    Good ideas do not grow on trees. Neither does the money it takes to design and produce the products or services based on those good ideas and to bring them to market. 

    One proven way to focus the design and development effort—and increase the odds for success—is to involve the customer in the earliest stages of the product development process. The impact of an effective customer-driven design program can be especially strong as companies pursue new product introductions in rapidly developing economies such as the BRICI nations (Brazil, Russia, China, India, and Indonesia). In these regions, demand runs high, the sheer number of potential new customers is enormous, and the historical, social, and cultural traditions are very different from those of the developed economies of the West.

    One of the first customer-driven design processes was Yoji Akao’s “quality function deployment” (QFD) method, which he introduced in Japan in 1966. The goal was to transform customer needs into engineering characteristics for a product or service.

    There have been many QFD-type advances in the last half-century that seek to hone the ability of companies to design products that meet customer needs. Today’s customer seeks differentiation. The ability to make the right tradeoffs during the initial product definition—shifting costs to support differentiating features—has become an increasingly important competitive capability. We know that differentiating 15 to 20 percent of the attributes of any given product is sufficient to make the overall product different in the eyes of the customer. There is no need to invest scarce resources in the remaining attributes. Identifying in advance where to invest in order to differentiate saves money and improves the product’s profitability. At BCG, we follow a four-step process that has helped numerous companies improve product design through more effective customer input.

    The first step is to define a coherent and consistent set of features that will determine the product’s performance and that can be compared with similar products already in the marketplace and evaluated in terms of the needs and wants of customers. This will include a coherent and shared vocabulary for these features that is understandable by all functions in the company and seeks to bridge gaps between customer desires and the company’s ability to deliver the requisite quality, manufacturability, and serviceability.

    Step two involves assembling these features into a concept and analyzing that concept and comparing it with others. In order to assist with this phase, we use a matrix that aligns product functionality with the attributes that customers value. It is fairly common to observe up to a 30 percent improvement in customer value when realigning product features with customer needs. In our experience, this adaptation also leads to a reduction of the product cost by 10 percent and an increase in sales of 25 percent.

    The results of the second step inform the third—making the difficult decisions about how to differentiate by comparing the defined concepts with competitive products, customer value, and product cost to evaluate the attractiveness of the concept in the targeted market. The last step, of course, is taking the full package back to the customer and getting validation that the right decisions have been made.

    In our experience, successful products result from the integration of brand attributes, customer needs, and manufacturing and regulatory requirements into a series of differentiating product features. If the customer’s voice is present from the outset, and development resources are allocated to designing the differentiating features that the customer wants, the chances for success are high. If, however, a company does a poor job in this critical initial phase, the resulting problems will persist throughout the remainder of the product life cycle and likely include bad design, value mismatch, overengineering or underengineering, and weak sales.

    Strong Processes, Strong Performance

    Strong performers define governance and decision-making processes, which leads to the on-time completion of projects. (See Exhibit 8.) They are far more likely than weak innovators to follow standardized processes in reviewing the progress of projects in development, adhere to decision-making criteria that are clear and transparent, and complete projects on time. They differentiate clearly among governance, portfolio management, and project management, and they recognize that a strong process requires being effective at all three. They also emphasize teamwork, ensuring sufficient communication among team members and representation on development teams from all relevant functions. (See “Breaking Through: Proven Idea-Generation Practices.”)

    exhibit

    P&G, which seeks to make innovation systemic, replicable, reliable, and integral to its business, has a rigorous four-stage process for idea development, selection, design, and launch. When the company launches a new product, it is striving to create the next billion-dollar brand.

    In the “search and discover” phase, the company seeks ideas from everywhere—consumers, retail customers, suppliers, and other partners. It invests small amounts of capital to test the viability of new concepts as they take shape. The second phase, “select and resource,” involves making harder choices and allocating human and financial resources to ideas that have the most promise. It combines some ideas into bigger opportunities. It kills the ones that don’t make the cut, terminating far more projects than it moves forward. 

    In phase three, “design and qualify,” multi¬disciplinary teams from product research, marketing, manufacturing, engineering, finance, design, and other functions develop comprehensive plans to meet demanding success criteria. These plans are qualified through a combination of virtual and physical tests. The surviving innovations move into the product launch pipeline, the final “launch and leverage” phase, which involves working out the in-market details: retail distribution, pricing, consumer trial, repeat purchase, and, ultimately, sales and profit. 

    Year in and year out, P&G innovations regularly lead to some of the top product introductions. Three P&G products were among the ten most successful product introductions in 2012, according to research firm SymphonyIRI.