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Study after study reveals that innovative companies are successful companies. So why do so many Australian companies tip-toe warily around risk, rather than embracing it as an elemental force driving commercial renewal?
People often ask me what’s the one thing they can do to help their company grow over the long term.
The idle answers are easy to imagine. “Oh, expand into new markets” or “Have you thought about this or that product extension?” Or “Follow the money, seek investment and invest it wisely”.
In fact, the evidence points overwhelmingly to a much more profound answer, which can be summed up in one word: Innovate.
The evidence is indeed compelling and comes from many sources. The IP Research Institute of Australia has conducted an annual survey of company innovation activity every year for the past decade. It found that of the top 50 R&D spenders for whom five-year data was available, their spend on R&D per revenue was four times the national average. Most compellingly though, their return on shareholders’ funds was 17.1 percent compared with 7.7 percent for Australia’s top 1,000 enterprises.
There is further Australian data. Earlier this year, the Productivity Commission released its report into Public Support for Science and Innovation and surveyed the entire global literature on the business investment and return from research and development. Evidence over numerous studies revealed that the gross returns for R&D (including ‘spillovers’) averaged 165 percent, much higher than for other forms of private investment, including capital investment in physical plant and equipment.
The story is the same globally. The Boston Consulting Group 2007 Innovation Survey found that the 25 most innovative companies surveyed had a median annualised return of 14.3 percent from 1996 through 2005, a full 300 basis points better than that of the S&P Global 1,200 median. In the same vein, innovators increased median profit margins by 3.4 percent per year over ten years, compared with 0.4 percent for the median. The Arthur D. Little innovation excellence study found a similar boost in profit margins, and that top innovators had 2.5 times higher sales of new products. The IBM Global CEO survey shows a similar trend, with a historical excess in operating margin of 1.2 percent for product innovators and nearly 1.0 percent for business model innovators compared with their peers.
But, if it’s so simple, why do only one-third of Australian businesses report any innovation activity (in the Australian Bureau of Statistics survey)? Perhaps the others are secretly innovating without realising it or knowing what innovation is.Perhaps they don’t like reporting. Or perhaps they just have a death wish!
If you’re now convinced that your business should be innovating, what’s the single best thing you can do to begin? Place innovation as a standing item on the Board agenda. That single step will give it the attention it deserves. Risk appears on the agenda at most Board meetings – why not innovation? It is quite amazing that so many Australian companies choose to populate their boards with individuals whose entire careers are spent on audit and risk management, rather than innovation. Controlling or consuming wealth rather than creating it!
One only has to look at the emphasis placed by directors on corporate governance, compliance, and risk mitigation to realise that innovation can seem like such a dirty word in many boardrooms.
Innovation is the flip side of risk. Innovation is inherently risky – and many projects aimed at creating innovation will fail. Innovation needs to be balanced across the entire corporate spectrum, just as risk is. Like yin and yang, one is the counterpoint of the other. One creates growth, the other can stifle it. Both need to take their place at the top of the tree, and leaders need to champion both.
It is no longer sufficient to assume that because an organisation has ongoing product development reviewed by the Board, that an organisation has embraced innovation. Just as risk management should never be quarantined to a single project, nor should innovation be similarly constrained.
Looked at systematically, innovation involves collaborations, both within the organisation and externally.
Organisations serious about innovation should ask themselves if they perform the following functions:
- Is innovation part of our business strategy?
- Is there a culture where ideas are accepted and listened to?
- Are ideas from customers, staff, suppliers and partners logged and considered?
- Is there a systematic approach to screen, evaluate, fund and develop the best ideas?
- Is there a ‘not invented here’ culture that prevents collaboration and the diffusion of good ideas?
- Do we recognise and manage our intellectual property?
- Has our business ever worked with a research organisation?
- Are there KPIs around the number of high quality ideas generated, selected, funded and released to market?
If not, perhaps you too have a death wish.
Dr Rowan Gilmore is CEO of the Australian Institute for Commercialisation, which helps businesses, research organisations and governments increase the success rate of commercialising Australian innovation.
