What makes an industrial company stand above its peers? PwC recently released its 2018 Global 1000 Innovation Study authored by Barry Jaruzelski and Robert Chwalik revealing some interesting results. For the purposes of this study, PwC equated innovation with R&D spending. We could quibble with this definition, but let’s just run with it to see what they discovered.
Two key takeaways I noticed included top management encouragement and focus on customers—insights as well as experiences.
The report also shares 6 characteristics that high-leverage innovators and high-performance companies share that help them remain competitive.
The 2018 Global Innovation 1000 study included the 1,000 publicly held companies that spent the most on research and development. They looked at R&D spending trends and financial results over the last 15 years. A very select group of companies that consistently beat their peers on seven key financial metrics—and spent their R&D dollars more efficiently. They call these companies ‘high-leverage innovators.’
Only 88 of the Global Innovation 1000 companies qualified as high-leverage innovators for the five years ended 2017. Overall, they had higher sales and market capitalization growth, lower R&D expenditures as a percentage of sales, higher gross profit growth, higher operating income growth, and better total shareholder returns. Only two companies, Apple and Stanley Black & Decker, made the high-leverage innovator cut for the entire 15-year period.
In the 2018 ranking, the highest R&D spending industrial firms included Siemens, General Electric, Toshiba, Hon Hai Precision, Koninklijke Philips, Mitsubishi Electric, Caterpillar, China State Construction Engineering, and 3M.
Overall, the 161 industrial firms in the Innovation 1000 increased their R&D spending from $71.2B in 2017 to $82.5B in 2018, an increase of 15.9 percentage points. But total revenue increased as well, so that R&D intensity was unchanged at 2.8%. In comparison, R&D intensity levels for the 1000 global innovators in the study was 4.5% for both 2017 and 2018.
To gain further insights they surveyed a sample of leaders and managers to find out about their innovation efforts. Both the high-leverage innovators and the larger universe of companies that report relatively high performance share the following six key characteristics:
- They closely align innovation 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.
- They create company-wide 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.
- Their top leadership is closely involved with innovation. 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.
- They base innovation on direct insights from end-users. All of our survey respondents 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 are looking for improvements.
- They rigorously control project selection early in the innovation process. Companies reporting faster growth are most likely to say project selection is the innovation stage with the most opportunity for improvement.
- They excel at the first five characteristics and integrate them to create unique customer experiences. Companies at the highest level of innovation leadership excel at every aspect of innovation. And they work to push the boundaries of market expectations and transform the customer experience.
High-leverage innovators understand the importance of R&D spending. But they also know that is not enough. Innovation success is the result of painstaking attention to strategy, culture, executive involvement, customer insights, and execution throughout the stages of innovation—all focused on creating unique customer experiences.