Highlights
- Innovation research reveals that the top growth companies invest approximately four times more in transformative innovation than lower growth companies. By comparison, the lower growth companies allocated 90 percent or more of their budget to incremental programs.
- The highest growth companies were about twice as likely to convert new products into new revenue compared to all respondents. This cohort, on average, created new revenue streams equivalent to 21 percent of total revenues. That compares to 11 percent among all respondents.
- The top growth companies used innovation to achieve price premiums 2.9 times more frequently than all other respondents. This cohort also incurred price decreases 2 times less than all respondents.
Innovation Research Findings
Innovation is the process of converting a novel idea into a unique product, service or experience that creates value. This may include creating new or improved products and services, or new ways for customers to acquire, consume, use, experience or benefit from products or services.
Research performed for the Business Growth Report sought to identify how the highest growth companies use this business growth strategy to outperform lower growth companies.
The survey posed questions to identify and measure innovative programs and practices that correlate to company growth. Four factors stood above others due to their impact to revenue growth.
Staffing Correlates with Revenue Growth
Creating or improving products and services begins with resources. The survey asked how the teams were staffed. The responses are shown below for all respondents and for the Best-in-Class respondents (i.e., the top 15 percent growth companies).
The highest growth companies staffed their teams will full-time and dedicated resources 2.3 times more frequently than all others. Comments in the survey indicated some companies rotated staff into the team periodically. However, most team members were permanent in order to harness lessons, build expertise and maintain institutional knowledge.
When we correlated team staffing with company size, we found that the larger the company, the more likely the team was staffed with full-time and dedicated resources.
Investment Amount Correlates with Success
Apple invests 5% of its annual revenues in innovation. Facebook invests over 13%, Google over 16% and Amazon more than 28%. But are these companies outliers or representative of the highest growth companies?
We wanted to understand the link between innovation investment and revenue generated from that investment. So, we started with investment questions, including the one below.
The data revealed three separate but related findings.
First, as illustrated in the above chart, the median investment among all respondents was 3 to 6 percent while the median investment for the highest growth companies was 7 to 10 percent.
Second, when we analyzed investment by company size, we found that when measured as a percentage of revenue, midsize businesses ($100M-$1B) invested 51 percent more than small business (less than $100M) and 39 percent more than the largest companies (more than $1B).
Third, budgets varied significantly by type of program. When we compared the type to the vitality index (described in the following section), the data revealed that respondents with the highest new revenue streams invested 16-20 percent more into transformative innovation. For this cohort, on average, about 40 percent of their budget was directed to transformative efforts.
By comparison, respondents with the lowest new revenue streams allocated 90 percent or more of their budget to incremental innovation. This type of investment is generally limited to improving existing products and services.
Three decades of our own anecdotal experience show that incremental programs are an easy choice. After all, what company doesn't continuously advance their products and services? Unfortunately, the safest method is also the lowest payback.
Finally, budgets varied significant by industry, but that was neither surprising nor revealing. The highest investment industries included technology, life sciences and aerospace.
New Revenue Streams
The vitality index measures new revenues produced from new products or services. It's equal to new product sales as a percentage of total sales over a set number of years. Most companies use a three-year horizon for this calculation.
The below combination chart shows revenue generated from new products or services among all respondents and the highest revenue growth respondents.
The data reveals that the Best-in-Class performance archetype was approximately twice as likely to convert new solutions into new revenue when compared with all others. The Best-in-Class performance archetype, on average, created new revenue streams equivalent to about 21 percent of total revenues. That compares to 11 percent among all respondents.
Top Innovators Earn Price Premiums
Most industries face continuously accelerating commoditization of products and services that deteriorate revenues and margins. Innovation is the response to commoditization.
To measure success, we posed the below question.
Innovation research shows the highest growth companies used this growth strategy to achieve price premiums 2.9 times more frequently than all other companies.
Click to TweetAs illustrated in the above clustered column chart, the Best-in-Class archetype achieved price premiums 2.9 times more frequently than all other respondents. On the flip side, the Best-in-Class archetype incurred price decreases 2 times less than all other respondents.
Innovation is unique among company growth methods in that in addition to revenue growth, it also increases margins and profits. This is due in large part to differentiation that decreases competition.
Clearly, it is a risk-reward business growth equation. When successful, breakthrough products create differentiation, revenue growth, price premiums, higher margins and customer loyalty.
Innovating new products or services is not easy. But it's the most direct route for companies seeking differentiation, revenue growth, price premiums, increased margins, and customer loyalty. Growth and comfort do not coexist.