The Innovation Issue

In the age of globalisation, it’s how businesses innovate that counts

While “innovation” is increasingly reverberating as a buzzword in business – it is widely assumed from the get-go that it leads to better financial performance, if not guaranteed survival – there are few scientific measures of how it actually delivers. For example, when does a good idea stop being simply a good idea and become a real company advantage? And once it has become a real advantage, how can innovation achieve maximum impact? On behalf of CNBC European Business, strategy consultants PRTM surveyed 60 companies over a two-year period using around 150 product development metrics to identify specific levers for product and service innovation.

In the broadest sense, innovation can mean anything a company’s breathless PR department wants it mean – new business models, new ways of corralling customers, and multifarious transformations along the supply chain. The focus of the PRTM study was on product innovation, and 85% of study participants identified that they target innovation efforts toward the development of products (the remaining 15% tended to focus on innovative customer support, marketing or supply chain advancements).

Perhaps not too surprisingly, PRTM found that the type of companies that are “platform-focused” – Apple’s expanding iPod family, for example – and that are also fleet-footed, consistently applying advanced development practices, enjoy significantly better financial returns than others. Contrary to some other recent studies, however, PRTM concluded that success is more a product of how companies invest in innovations rather than the actual breakthroughs themselves. In other words, best practice methods exist, and there is no “magic” that a select band of entrepreneurs possess. As PRTM project leader Huw Andrews points out: “This is really science-based. There is a definitive link between how you do in business and your innovation. The universal bugbear of business is how to work innovation into a winning formula.”

Around a decade ago, the conventional wisdom was that all companies needed to do all or most of their innovation and product development in-house. Today the best companies know that they do not have exclusive ownership of successful ideas or products – nor do they need to, to be the leaders in their industry. Ideas and technologies come from many sources. Apple’s iPod might have won hearts and ears through its design, but the sound reference platform was outsourced from PortalPlayer. Google is a massively well-funded company, but many of the applications it supports are developed by third parties.

The current trend is to open-source or outsource R&D to suppliers and low-cost locations such as China or India, to benefit from local ideas and keep costs under control. While this is a proven model, it is in many ways more challenging to operate; the business benefits are clear, however, from the findings of the PRTM study. Nurturing an ecosystem of partners allows companies to innovate faster and develop better and more complete product ranges. A further benefit is that it increases companies’ ability to respond to opportunities or threats that emerge from unexpected quarters. PRTM discovered that companies which use partnerships extensively secure 40% of their product design content from partners and obtain 15% of their development from low-cost Asian countries.

Successful innovation strategy does not rely on one single project team to generate that winning idea – the net needs to be cast much wider. Innovative companies invest in a portfolio of ideas and projects to generate and deliver a consistent pipeline of innovative products. Such companies also invest in the processes to develop and deliver innovative products to market fast – for example, tracking and investing in advanced technologies by running research programmes to evaluate or improve technologies even if they haven’t achieved price or performance viability yet.

As measured by time to market from conceptualisation to commercial launch, innovation winners are four times as fast as the lowest performers, yielding nearly three times higher revenue growth and nearly double earnings growth compared to the latter. Leveraging well-known platforms drives revenue and profit through more effective use of R&D. These innovation winners earn over 90% of revenues from platforms, resulting in revenue growth of 2.4 times and earnings growth of 1.8 times that of companies that do not focus on platforms.

Development of advanced technologies in areas for which commercial viability has been demonstrated, such as the computer business, presents opportunity for market disruption and “changing the game” to a company’s advantage. Innovation winners here are seven times as productive as the lowest performers, resulting in earnings growth outpacing the lowest performers by a 21-point margin: 31% to 10%.

Speed of payback is predicated on building the right product (that customers desire), speed to market, and effective product launch and support. As measured by time to breakeven (from commercial launch), innovation winners achieve breakeven in approximately a quarter of the time as the lowest performers because they get to market quicker. Fashion chain Zara, for instance, is particularly good at getting its store managers to send customer feedback and observations to in-house design teams via PDAs. This helps the company to spot fashion trends and quickly adapt merchandise to local tastes.

While speed to market is important, this cannot be accomplished at the expense of quality. Innovative companies have a quality defects index (based on detected quality issues and customer complaints) that approaches zero and experience more than double the revenue growth of the lowest performers. While some organisations sacrifice quality to their own detriment, innovation winners demonstrate that doing so is unnecessary to achieve speed. The underlying message is, basically, to test people up front, involve manufacture and marketing people earlier in the development process, and spend money on as many prototypes as possible to ensure that problems are resolved earlier. Mobile phone companies that do not follow these rules might find their products developing a reputation for being difficult to use, while furniture manufacturers could find themselves becoming notorious for products that are difficult to self-assemble.

Put simply, great ideas are worthless on their own. The key to success is the development and delivery of the idea in the form of a novel product that customers will pay for. Ideas need to be filtered to separate the valuable from the merely clever, then separately funded through the delicate concept phase, where a “not invented here” attitude can kill them off. Product development teams must then be chartered to develop revenue-generating products, bringing together design, technologies, market creation, sales and volume delivery capabilities to turn the ideas into winners.

Platform products consist of at least 50% new product design and allow companies to expand existing markets and/or enable companies to enter major new markets. These innovation winners spend approximately 35% of their R&D budgets on platform products and are rewarded with earnings and revenue growth of 1.5 times that of companies that spend the least on platforms. PRTM found that the fastest companies could launch a new product in 40 weeks and pay back research and development outlay in 25.

There are many dimensions and drivers of productivity, such as being able to use platforms to build many products for the lowest possible outlay. Car manufacturers routinely build one engine and install it in several vehicles, reflecting potential buyers’ aspirations. The mobile phone business is another example of platform-based product development.

Another driver is that of how well a company focuses its own development staff on important revenue-earning products, rather than sales support, training, long-term research and so on. Companies with poor focus have only 44% of their development staff working on money-earning products, while more productive companies apply 73% of their staff to development in this area – as a result, they launch 30% more products. Obviously, this allows the latter companies to get more for less from their budgets.

PRTM concluded that “innovation winners” have found the key levers to drive business leadership through innovation leadership. The chart below illustrates the relationship between maturity of practices, the extent to which practices are consistently applied and the corresponding impacts on financial performance. PRTM’s staged maturity model begins with stage 1, functional excellence, with the highest level of maturity being the Holy Grail of stage 4, known as extended enterprise collaboration. This final stage basically means a company can manage all its elements, including its collaborators. This phase is particularly fraught for companies as they often have to deal with foreign suppliers and potential rivals while protecting their intellectual property rights. Give away the Crown Jewels and you can get screwed; don’t give enough incentives and you walk away empty-handed.

Maturity is an indicator of whether or not a company employs any of the practices for a given stage. Mastery is an indicator of the consistency and degree to which those practices are employed. Both are important. Innovation winners who have mastered stage 4 practices have compound annual revenue growth of 32%, nearly double that of solid stage 1 companies. Further, these same companies have compound annual earnings growth of an astounding 54%, nearly seven times higher than stage 1 companies.

Even though 55% of respondents to PRTM’s survey indicated that innovation leadership was their primary basis of competition, the pursuit of this alone does not yield better performance. Companies often say they want to be innovative, or think they are, but don’t back it up with the necessary actions. Interestingly, 32% of companies indicated customer relationships as a good arena in which to spring innovations – the Virgin Atlantic bells-and-whistles route – while only 13% favoured cost leadership – the no-frills budget airlines way.

For companies that pursued an innovation leadership approach, earnings margins ranged from 38% (top performers) to -14%. The top performers among companies that did not choose such an approach attained an earnings margin of just 23%, but the lowest performers still broke even. These results confirm that an innovation-leadership-based strategy can deliver the highest returns for companies but also incorporates higher risk.

PRTM warns that it is important to optimise, not maximize, the number of platforms in a company’s portfolio. An organisation needs to recognize its limitations when developing and launching platform products. Having too few platforms creates inefficiencies, while having too many stretches an organisation’s ability to effectively develop, deliver, and support them. Study participants were grouped into quintiles as measured by number of platform launches per $bn of revenue. The second quintile, representing about half the number of platform launches as the top quintile, delivered revenue growth of over two times and earnings growth of over three times that of the most active platform launchers.

PRTM’s study concludes that while company strategies may differ hugely, innovation winners enjoy superior financial performance by applying all the management levers available. Companies, particularly their product managers, need to have a very good understanding of their customers and technologies to generate a constant idea stream and understand the product from a resource perspective. The golden rule is to look at how an individual product starts out – not with a product, but with an evaluation of the concept followed by rigorous feasibility studies.

THE STAGES OF INNOVATION

50 key innovators

Not all successful innovations are converted into immediate financial rewards, as the PRTM Global Product Innovation Benchmark study notes (indeed, in sectors such as biotechnology, innovation and profits can appear irreconcilable for years). Without innovation, however, businesses will find that they simply cannot grow at all.

As Steve Jobs claimed at the launch of the iPhone in January, the latest Apple device is not revolutionary but evolutionary. In other words, while revolutions can be short-lived – a lesson Apple has learned the hard way – entrepreneurs must continuously evolve in order to safeguard the survival of their species.

On the following pages we present 50 of the most innovative companies, large and small, working in Europe today. A variety of experts from each sector contributed to this list, and all company valuations were performed by Thomson Financial.

LEGEND

Media & entertainment
ARTS ALLIANCE	BSKYB	FRANCE TELECOM	BEBO	CONSTANTIN
LONDON, UK	LONDON, UK	PARIS, FRANCE	LONDON, UK	MUNICH, GERMANY
PRIVATE	LISTED	LISTED	PRIVATE	PRIVATE
HOWARD KIEDAISCH	JAMES MURDOCH	DIDIER LOMBARD	MICHAEL BIRCH	FRED KOGEL
N/A	$16.55 BILLION	$50.74 BILLION	N/A	N/A
N/A	$19.13 BILLION	$58.02 BILLION	N/A	N/A
This digital film distribution company is fast consolidating its presence as a powerful European digital network, delivering film to the cinema, to the home and between industry players. It is now positioning itself for a digital download future and as an invaluable source of customer data to be sold to studios or used to make the company’s own films.	BSKYB recently stole a march on its rivals by announcing free broadband to all its members, thus proving the bandwidth advantage it gained over rivals when it bought Easynet in 2005. The same maneouvre permitted it to pioneer HDTV in the UK and in Italy, where it owns Sky Italia. Although NTL is not far behind, it’s hampered by different local networks.	In 2006 France Telecom jumped into the business of financing entertainment content eventually to be shown on its mobile/VOD platforms. This is bolder than Britain’s BT, which will probably rely on “user-generated” content to augment Hollywood movies, and Spain’s Telefonica, which nixed production in favour of amateur content too.	MySpace might be the number five site on the internet and the top-ranked non-search engine, but Bebo at number 168 was the most popular Google search of the year. Bebo is gaining ground outside the US as an online hangout for young people to chat with friends and post blogs and music, and has evolved into a marketing tool for celebrities and bands.	Constantin had a terrific year at the German box office, mostly with local-language films – and it co-produced one of Europe’s biggest international hits, an adaptation of the hit novel Perfume. The idea that those who play the local game and understand their local audiences can prevail amid Hollywood’s globalisation is innovative in itself.

Construction & architecture
HERZOG DE MEURON	OFFICE OF METROPOLITAN ARCHITECTURE (OMA)	URBAN SPLASH	VON GERKAN MARG & PARTNERS	ZAHA HADID ARCHITECTS
BASEL, SWITZERLAND	ROTTERDAM, THE NETHERLANDS	MANCHESTER, UK	HAMBURG, GERMANY	LONDON, UK
PRIVATE	PRIVATE	PRIVATE	PRIVATE	PRIVATE
JACQUES HERZOG AND PIERRE DE MEURON	VICTOR VAN DER CHIJS	TOM BLOXHAM AND JONATHAN FALKINGHAM	MEINHARD VON GERKAN AND VOLKWIN MARG	ZAHA HADID
N/A	N/A	N/A	N/A	N/A
N/A	N/A	N/A	N/A	N/A
Herzog de Meuron continues to deliver some of the world’s most innovative large-scale project, such as the Küppersmühle Museum in Duisburg, Germany (1999) and Tate Modern in London (2000). In the pipeline are the new stadium for the 2008 Olympics in Beijing and the Miami Art Museum in Florida, scheduled for completion in 2010.	Founded as a collaborative venture in 1975 by Rem Koolhaas, Elia and Zoe Zenghelis and Madelon Vriesendorp, OMA remains a highly innovative and influential architecture powerhouse. New projects include the Danish Architecture Centre, Education City in Qatar, Riga Harbour and Kuwait City’s Master Plan development.	Urban Splash has already created over 1 million ft2 of award-winning loft-living and commercial space, kick-starting urban regeneration in the UK regions. The company has come a long way since its inception in 1993; it now employs over 200 people and is currently developing property with a value of over €300m – and there’s another 100 million ft2 in the pipeline.	This ambitious firm, which modernised the Olympic Stadium in Berlin, is one of the few European companies to have expanded extensively in China – it has been involved in 200 design projects there. It also has offices in Shanghai and Hanoi. The standout project is Lingang New City, a brand new port city for 800,000 inhabitants near Shanghai.	Iraqi-born Zana Hadid’s most famous projects include the Vitra Fire Station and LFone pavilion in Germany, and the Bergisel Ski Jump in Innsbruck, Austria. Current projects include the Central Plant Building for BMW in Leipzig and the MAXXI Museum in Rome. The company has recently made a move into furniture and interiors.

Transport & travel
BMW	VIRGIN ATLANTIC	ROLLS-ROYCE	YOTEL	EXPEDIA EUROPE
MUNICH, GERMANY	CRAWLEY, UK	LONDON, UK	LONDON, UK	LONDON, UK
LISTED	PRIVATE	LISTED	PRIVATE	PUBLIC
HELMUT PANKE	STEVE RIDGWAY	SIR JOHN ROSE	SIMON WOODROFFE	DERMOT HALPIN
$27.85 BILLION	N/A	$13.33 BILLION	N/A	$8.16 BILLION
$34.34 BILLION	N/A	$17.05 BILLION	N/A	$6.54 BILLION
BMW orchestrates brilliant innovations like no other company by taking hand-picked staff from all divisions and relocating them to a research and innovation centre for periods as long as three years. This guarantees ownership of each project and a profound attachment to the new model in question on the part of those who have created it.	Virgin Atlantic continuously comes up with product innovation and aspirational incentives. In 2005, when airline revenues were plummeting, Virgin’s Upper Class enjoyed a 26% increase in travellers. Investment in research and design burnish Virgin’s reputation. In 2006, the Premium Economy class – a much-copied Virgin invention – got an overhaul.	Operating in the four key global markets of civil and defence aerospace, marine and energy, innovation has been central to Rolls-Royce’s strategy for over a decade. The company has built 25 university technology centres around the world. It has access to leading researchers and first pick of the top engineers for its internal R&D activities.	Inspired by British Airways first class and Japanese capsule hotels, Yotel is a revolutionary concept that launches this month at the UK’s Gatwick and Heathrow airports. Passengers can rent hotel rooms within airport terminals, hourly. The 10.5 m² rooms feature Wi-Fi, toiletries,, bathroom and flatscreen TV. International rollout is imminent.	Expedia is one of the world’s leading online travel companies. Its European arm, which operates websites in France, Germany, Italy, the Netherlands and the UK, accounts for more than 50% of transactions. Expedia Europe also runs Anyway. com, a leading seller of discount air travel in France, and Voyages-sncf.fr with railway company SNCF.

IT
TISCALI	SKYPE TECHNOLOGIES SA	ARESA A/S	INDUSTRIA	ICERA
CAGLIARI, ITALY	LONDON, UK	COPENHAGEN, DENMARK	REYKJAVIK, ICELAND	BRISTOL, UK
LISTED	PRIVATE	LISTED	PRIVATE	PRIVATE
RUDOLF DERK (RUUD) HUISMAN	NIKLAS ZENNSTROM	JARNE ELLEHOLM	GUDJON MAR GUDJONSSON	STAN BOLAND
$1.31 BILLION	N/A	N/A	N/A	N/A
$1.48 BILLION	N/A	N/A	N/A	N/A
This Sardinia-based operator has managed to completely turn around its northern European strategy to become a major player in IPTV, the new medium set to make the internet look like Teletext. Former chairman Renato Soru founded the company in 1998 and owns almost 30% – surely one of the most accomplished businesspeople in Europe.	Skype continues to amaze. Founder Niklas Zennstrom has gone from start-up to handling an incredible 7% of international call volume in four years. Calls are free when made PC-to-PC, but the newer SkypeOut service allows PC-to-phone calling at much lower rates than traditional phone services. Disruptive tech doesn’t come any better.	Listed on the OMX in February last year, Carsten Meier’s company has discovered a plant that changes colour within the vicinity of land mines and UXOs, allowing a biosensor function. This start-up also has a novel method of producing and screening antibodies and proteins in plants, with a view to treating a wide range of diseases.	Industria’s ambition can be seen in its office locations: the UK, Ireland, Bulgaria and China. This Icelandic tiger specialises in software for bridging mobile and fixed-line networks, and its IPTV services platform subsidiary Zignal is creating a real stir. Potentially one of the biggest contributors to a European future of digital convergence and IPTV.	Icera has developed a disruptive new architecture for mobile phones, called Livanto. Basically, the company wants the mobile phone to become a mere husk so that new infrastructure can be field-upgraded, to “break the vicious cycle of handset availability lagging behind infrastructure for new standards”.

Design
ADIDAS	DROOG DESIGN	MATERIALISE.MGX	NOKIA CORP	SEYMOUR POWELL.
HERZOGENAURACH, GERMANY	AMSTERDAM, THE NETHERLANDS	LEUVEN, BELGIUM	ESPOOL, FINLAND	LONDON, UK
LISTED	PRIVATE	PRIVATE	LISTED	PRIVATE
HERBERT HAINER	RENNY RAMAKERS	KEY INNOVATOR: PATRICK JOUIN	OLLI-PEKKA KALLASVUO	RICHARD SEYMOUR AND DICK POWELL
$8.28 BILLION	N/A	N/A	$68.95 BILLION	N/A
$7.68 BILLION	N/A	N/A	$61.83 BILLION	N/A
Adidas aims to launch at least one major new technological innovation every year. It recently introduced “the first intelligent shoe”, with a microprocessor that adjusts the shoe’s level of cushioning to suit its environment. The company has also ramped up it retail outlets, making them as fetishised as Apple’s and a million mile