Innovation Trends - A Case

Innovation Trends – A case study

We are often use Return on investment as a measure of efficiency of an organization. Let us try an take a look at Return on Innovation (ROIn) that companies may want to use to measure their innovation efficiencies. There are several interesting topics I came across recently on this topic, which sparked my thought process. The questions that arise in my mind:

1. Why do companies invest in innovation?

2. How much do companies invest in innovation initiatives?

3. How does companies measure success of their innovation initiative?

4. Is there a potential business in outsourcing for innovation?

In this, article we try and address some of these topics.

Reasons for Investment in Innovation

Typical reasons often seen are:

1. Gain market share

2. Increase profitability

3. Long-term survival

4. Others

Of course, all the above are the most important in Pharmaceuticals, health-care and bio-tech companies. Off late one is seeing rampant invest across the industry spectrum for competitive advantage.

Investments in Innovation

The answer to this question varies from company to company. It is best to see what is the typical investment in R&D for an industry group (similar set of companies) and compare it with how the company fares. Rather than looking at just the absolute R&D investment figures (some companies do not report it and others do it just to capitalize on the incentives provided for R&D such as tax breaks.). Some of the numbers we look at are staggering. NA companies spent USD 194.2 billion between 2005-2006 with a y-o-y growth of 10-15% (study conducted by Booz Allen and Hamilton). Other geographies are also quickly catching up as per the study. It is estimated that India & china spend about USD 2.1 billion and growing at 25% y-o-y.

But unfortunately, all spend do not necessarily translate to innovation. The recently published report from DSIR in India is a good indicator of the number of patent filed (since 2005) as a proportion to the R&D spend for Automotive industry. For example Tata Motors ranks as number 4 in the Worlds most innovative companies in Business week, , their R&D spend for the year 2006-2007 was USD 113 million (using Rs 43 per USD) and they filed 5 patents. Interestingly so TVS Motor company had spent USD 3.8 million and filed 29 patents.

Measuring success of Innovation

A very interesting study was recently published by BCG polling some 377 senior executives on measuring innovation. In this study only 28% of executives believe that they have received returns from investments on innovation. It is important to understand what are the key metrics that are used to measure innovation. This is best understood by categorizing these metrics as Efficiency, Effectiveness, and Size metrics (similar to the financial ration analysis category metrics we use):

Size metrics

1. R&D investment as % of sales

2. Number of patents filed

Effectiveness metrics

1. Net new revenue generated from new products/services (read innovation)

2. Profitability attributed directly to Innovation

3. Time to Market improvements due to Innovation

Efficiency metrics

1. % Revenue generated from new products/services vis-a-vis existing offerings

2. % Margin improvements from new products/services vis-a-vis existing offerings

Trends in Outsourcing Innovation

Innovation outsourcing is not new, but lately one is monitoring and tracking it. US government has publishes a detailed report “Innovation in Global Industries” detailing this trend. To improve the innovation efficiency and effectiveness metrics companies look to outsourcing for innovation. The key criteria used for outsourcing innovation are:

1. Cost arbitrages

2. Availability of talent

3. Proximity to markets

4. Industry eco-system advantages