Failure To Invest In Innovation Could Be The Death Knell Of Many Organisations

Innovation is becoming the number one strategic issue for CEOs around the world, as recognition grows about the link between innovation and organisational growth and value creation. The most valuable organisations of tomorrow will be idea-rich, have a culture where innovation is embedded as a core capability and value, and will embrace new and unusual ways of fostering innovation, for example through the creative use of venture capital.

These are some of the key findings to emerge from the latest research by PricewaterhouseCoopers - 'Innovation and Growth: A Global Perspective'. The survey of over 800 companies in seven countries covering 26 industry sectors reveals an inextricable link between innovation within an organisation and value creation. The research shows a 10% increase in the proportion of turnover generated from products and services introduced in the last five years leads to a 2.5% increase in revenue growth, year on year. Moreover, companies that generate 80% of their revenue from new products have typically doubled their market capitalisation in a five-year period.

The survey of CEOs, Board Directors and senior managers throws the 'innovation gap' between the best and worst performing companies into sharp relief. High performing companies - those which generate annual total shareholder return (TSR) in excess of 37% and have seen consistent revenue growth over the last five years - average 61% of their turnover from new products and services. For low performers - generating less than 6% TSR annually with shrinking revenues - only 26% of turnover comes from new products and services.

Across different industry sectors, unsurprisingly, the technology industry is the most successful at generating growth through innovation with an average of 70% of turnover coming from new products or services. Energy and banking follow with 50% and 45% respectively. The food and drink industry is the least successful at building growth through innovation, generating only 21% of turnover from new products.

Some industries are closing the innovation gap faster than others, driven largely by the spread of e-business. Entertainment and media businesses are launching an average of 30 new products and services each year. Investment management is the least innovative industry sector, with businesses averaging only one product launch in a year.

Frank Milton, European Performance Improvement Leader, PricewaterhouseCoopers Management Consulting Services, said:

"Poor performing businesses rely on 'the next big thing'. If it doesn't arrive, they have little else in their portfolio from which to deliver value or revenue growth."

"We forecast a sharp rise in the proportion of turnover from new products and services across all industry sectors over the next five years, as the march of e-business forces companies to differentiate themselves through innovation. In order to be an innovative company in the 21st century, organisations must pursue at least 50% of turnover from products and services introduced within the last five years."

The profound effect of e-business as a driver and shaper of future innovation within organisations is a central theme of the PricewaterhouseCoopers survey. Half the participants believe that e-business will require substantially or radically more innovation than the current trading environment, with the number one focus for innovation going forward being customer relationship management, followed by service development.

Milton said:

"E-business is certain to intensify innovation efforts more than any period since the 1930s, and customer intimacy will be the primary focus of those efforts. Companies with the greatest degree of consumer insight will be most able to respond appropriately in a world where the pace of change in consumer behaviour gathers momentum every day."

The survey indicates that the most successful organisations are adopting a completely new approach to innovation, characterised by the following:

• The use of external and internal ventures capital as a fillip to innovation and to the process of taking ideas to market. All of the top 5% of best performing companies in the survey used external venture capital for new product development (NPD) purposes, often establishing separate companies which use seed capital from the parent company to nurture or incubate new product concepts and business venture ideas. Two-thirds of these top-performing organisations also fund innovation and NPD through internal venture capital, most commonly to fund sabbaticals for 'intrapreneurial' staff to work on new ideas.
• Adopting an open management style, whereby all employees are empowered to turn their ideas into action, rather than waiting on a bureaucratic set of decisions. 73% of the most innovative companies in the PricewaterhouseCoopers survey exhibit this style.
• Re-defining the role of the corporate centre away from direction and strategy planning, to fostering a climate for change, where the flow of responsibility and accountability for turning ideas into action is ever outward.
• Harnessing technology to enable 'any place any time' idea generation to become a reality. E-mail and GroupWare were cited by 80% of the top performers in the survey as key enablers in moving away from a 'same place same time' approach to idea generation and management.

Notes:

1. 'Innovation and Growth: A Global Perspective' is part of an ongoing research programme by PricewaterhouseCoopers. It was conducted among Board Directors and senior managers at 800 organisations throughout the UK, France, Germany, Spain, Australia, Japan and the US. To find out more on Innovation and Growth, go to the PricewaterhouseCoopers web site www.pwcglobal.com/innovation
2. As part of the research programme, MORI was responsible for interviews with 478 respondents. Most interviews were conducted by telephone. Fieldwork took place between July and September 1999.
3. Copies of the Report are available by contacting +44 020-7463 8173 or email [email protected] at a cost of $495
4. The Management Consulting Services practice of PricewaterhouseCoopers helps clients maximise their business performance by integrating strategic change, process improvements and technology solutions. Through a worldwide network of skills and resources, consultants manage complex projects with global capabilities and local knowledge, from strategy through implementation.
5. PricewaterhouseCoopers is the world's largest professional services organisation. Drawing on the knowledge and skills of 150,000 people in 150 countries we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance.

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