A couple of weeks ago I posted “How innovative is your organization” in order to discuss some fundamental aspects of innovation. In this post we will look at the impact of innovation. My personal observation is that most organizations see innovation as a very positive measure. Of course, being innovative sounds fine and offers a lot of benefits, e.g. to protect competitive advantages. But to tell the truth, this statement is a little bit too general. Hence let us look at some research results: There is no simple and direct interrelation between innovation and corporate success like “the higher the rate of innovation the more successful the company”. Indeed, 70 % of above average successful companies use a growth and innovation approach in their strategy. Hence it could be argued that innovation would be a generally appropriate instrument to increase corporate value. But results from two different research projects indicate that factors like market size and complexity can also have an impact on the success of an innovation.
Outcome of the PIMS-Research. In the early 60’s the PIMS-research project (Profit Impact of Market Strategy) was started by Fred Borch (GE). The project was managed by Sidney Schoeffler (Harvard Business School). Objective of the PIMS-project is to identify the “laws of the market place” by collecting and analyzing data from various industries. The next stage in analyzing data is to derivate those factors, which are essential for the corporate success. The result of this research project was the identification of 8 major success factors. Using these 8 factors it is possible to explain 70 – 80 % of the variation in success of a business unit. To measure success the ratios ROI (return on investment) and ROS (return on sales = net profit before tax and interest related to sales) will be calculated. The factors are: Investment intensity, productivity, and market share, degree of market growth, quality, degree of innovation; vertical integration, and customer profile.
The degree of innovation represents the percentage of sales of those products, which are not older than three years. But in terms of innovation impact it is essential to consider another factor, too. To gain a positive impact from an innovation on corporate results it is required to own a certain market share. If this is not achieved, costs of innovation are higher than the value added from innovation.
In summary it can be argued that – due to its costs – an innovation has a positive effect on the results in the case that the company has a sufficiently high market share. In the case of small market shares innovations can have a negative effect on corporate success.
I am back from my recent business trip to Istanbul. There is a saying in German which translated has the meaning of traveling would be equal to education. In this particular case I had to learn that companies still have a confusing understanding how to manage their customers. We have to keep in mind that there is large number of articles and books available how to manage a stable company – customer relationship and to tackle customers.
This is a toaster with a design made by Porsche. It’s sort of weird, but this device was object of a question during the Porsche’s Annual General Meeting, the world famous German sports car maker. A couple of days ago the Annual General Meeting of Porsche took place. It was a good example that understanding your stakeholders (in this case represented by shareholders) can be tricky. When discussing product development and environmental issues Mr. Wiedeking (CEO of Porsche) argued that the company would not employ ideology as an approach when developing cars; instead it would focus on the market.