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THE BOSTON CONSULTING GROUP

Innovation 2006

BCGSENIORMANAGEMENTSURVEY

© The Boston Consulting Group, Inc. 2006. All rights reserved.

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2 BCG SURVEY

Since its founding in 1963, The Boston Consulting Group has focused on helping clients achieve competitive advantage. Our firm believes that best practices or benchmarks are rarely enough to create lastingvalue and that positive change requires new insight into economics and markets and the organizationalcapabilities to chart and deliver on winning strategies. We consider every assignment to be a unique set ofopportunities and constraints for which no standard solution will be adequate. BCG has 61 offices in 36countries and serves companies in all industries and markets. For further information, please visit our Web site at www.bcg.com.

3Innovation 2006

Table of Contents

Executive Summary 4

The Outlook for 2006: More Spending—and the Quest for Higher Returns 5

Driving Innovation: Objectives and Tactics 10

Execution: Weaknesses and Strengths 15

Best in Class: The Most Innovative Companies 18

Taking Innovation to the Next Level 22

Survey Methodology 26

For More Information 28

The Boston Consulting Group recently completedits third annual global survey of senior executiveson innovation and the innovation-to-cash (ITC)process, which covers the many interrelated activi-ties involved in turning ideas into financial returns.The process goes well beyond ideation and new-product development to include such issues as port-folio management, life-cycle management, andorganizational alignment. A total of 1,070 execu-tives, representing 63 countries and all major indus-tries, responded to the survey. We thank them fortheir participation.

This executive summary highlights some of the survey’s high-level findings. The body of the reportexplores the implications of the findings and pro-vides greater detail. It also offers a framework toguide managers as they think about how to turntheir ideas into bottom-line results. For additionalinformation, please see the list of contacts at theend of the report.

Some of the report’s key findings include the following:

• Innovation remains a top strategic focus for manycompanies, with 72 percent of the executives wesurveyed ranking it a top-three strategic priorityversus 66 percent in 2005.

• Seventy-two percent of respondents said theircompanies will increase spending on innovationin 2006.

• At the same time, many executives—nearly half ofthose surveyed—remain unsatisfied with thefinancial returns on their companies’ investmentsin innovation.

• Executives consider Apple Computer, Google,3M, Toyota Motor, and Microsoft the world’s mostinnovative companies, with Apple the clearleader.

• Globalization, organizational issues (such as metrics and measurement, structure, and peo-ple), and leadership remain three of the biggestchallenges facing companies that are seeking tobecome more innovative.

James P. AndrewSenior Vice President and Director

Worldwide Leader, Innovation andCommercialization Topic Area

Executive Summary

4 BCG SURVEY

5

The Outlook for 2006: More Spending—and theQuest for Higher Returns

Our latest annual survey on innovation, conductedin early 2006, yielded a number of new insights oncompanies’ efforts to foster innovation. At the sametime, there were several consistent themes that car-ried through from the previous two years. The over-arching message, in particular, remains constant:most companies are strongly committed to innova-tion and consider it critical to their success, perhapseven their viability. And they are willing to pay forit. But many seriously doubt they’re earning suffi-cient return on their investment.

First, a snapshot of spending plans. Nearly threeout of four executives said their companies wouldincrease year-over-year spending on innovation in2006, on par with last year’s response. And a largeand growing percentage of respondents—41 percent, versus 27 percent in 2005—said theyplanned to increase spending significantly (that is,by more than 10 percent). (See Exhibit 1.) This increased willingness to spend reflects thesteadily rising degree of importance executives are

attaching to innovation and organic growth.Indeed, 72 percent of respondents identified inno-vation as one of their company’s top-three strategicpriorities. Forty percent said it was their top strate-gic priority, compared with only 19 percent in 2005.(See Exhibit 2.)

Companies are increasing their emphasis on inno-vation for good reason, it turns out. Innovation, ourresearch shows, translates into superior long-termstock-market performance: the 25 most innovativecompanies (as defined by our survey respondents)had a median annualized return of 14.3 percentfrom 1996 through 2005, a full 300 basis points bet-ter than that of the S&P Global 1200 median. (SeeExhibit 3.) The driver of that outperformance wasthese companies’ ability to expand margins at asuperior rate without sacrificing growth: innovatorsincreased median profit margins by an annualized3.4 percentage points per year over the ten-yearperiod, versus 0.4 percent for the medianStandard & Poor’s Global 1200 company. And they

Innovation 2006

E X H I B I T 1

MANY COMPANIES ARE SPENDING MORE ON INNOVATION. . .How will your company’s investments in innovation compare with last year?

SOURCES: BCG 2005 Senior Executive Innovation Survey; BCG 2006 Senior Executive Innovation Survey.

Percentage of respondents

Decrease significantly(>10%)

Decrease slightly(1%–10%)

Stay the sameIncrease slightly(1%–10%)

Increase significantly(>10%)

20

0

40

60

80

100

2006 2005

41

31

25

27

47

22

22

21

6 BCG SURVEY

E X H I B I T 3

INNOVATIVE COMPANIES HAVE SUPERIOR LONG-TERM STOCK-MARKET PERFORMANCETotal shareholder return for innovative companies(1) versus relevant benchmarks (1996 through 2005)

SOURCES: BCG 2006 Senior Executive Innovation Survey; BCG ValueScience analysis.

10-Year annualizedTSR(2)

(%)

E X H I B I T 2

. . .AS INNOVATION BECOMES A GREATER PRIORITYWhere does innovation rank among your company’s strategic priorities?



(1) As identified by survey respondents. “Global Innovators” encompasses the top 25 companies identified overall. The U.S., European, and Asian groupings encompass all ofthe companies domiciled in those respective countries/regions that were identified as innovative by respondents from those respective countries/regions.

(2) Total shareholder return (TSR) is defined as capital appreciation (i.e., change in share price) plus dividends.

Top 3 priority Top 10 priority Not a priorityTop priority

20

0

40

60

80

100

2006 2005

40

19

47

27

7

32

21

7

Innovator Median Benchmark Median

Global Innovators vs. S&P Global 1200

U.S. Innovators vs. S&P 500

European Innovators vs. S&P Euro 350

Asian Innovators vs. S&P Asian Composite

18

16

14

12

10

8

6

4

2

0

7Innovation 2006

E X H I B I T 4

MEDIA AND ENTERTAINMENT FIRMS PLAN THE BIGGEST PERCENTAGE INCREASES IN SPENDINGHow will your company’s investments in innovation compare with last year?

SOURCE: BCG 2006 Senior Executive Innovation Survey.


did this while keeping revenue growth on pace—9 percent per annum—with the index median.

Spending More, Yet Dissatisfaction Remains

Plans to boost spending were fairly consistent acrossgeographies. By industry, media and entertainmentcompanies had the most aggressive intentions, withfully 84 percent of respondents saying they plannedto increase innovation spending and 56 percentplanning to increase it significantly. A relativelyhigh percentage of companies in the telecommuni-cations, consumer products and retail, and healthcare industries also planned to boost spending sig-nificantly. Energy companies proved the most con-servative, with 56 percent expecting to raise spend-ing and only 15 percent planning to raise itsignificantly. (See Exhibit 4.)

Although companies are digging deeper into theirpockets to spur innovation, many continue to question the effectiveness of that spending. In fact,nearly half of the respondents we polled were unsatisfied with the financial returns on their

investments in innovation, a percentage littlechanged from 2005 (though an improvement over2004, when 57 percent of respondents expresseddissatisfaction). (See Exhibit 5.) Reasons cited werenumerous, ranging from difficulties in accuratelygauging costs and, ultimately, returns, to culturalissues that stifle productivity and squanderresources. By industry, dissatisfaction was highestamong industrial goods companies, with 56 percentof respondents saying they were unhappy with theirreturn on investment. (See Exhibit 6.)

Additionally, only 52 percent of respondents con-sidered their company’s innovation capabilities—the people, processes, resources, etc., necessary toturn ideas into cash—to be superior to those oftheir competitors. Though this is a slight improve-ment from 2005, when 48 percent of respondentsconsidered their companies to have superior capa-bilities, it still indicates how significant the chal-lenge remains for most senior executives.

Taken as a whole, then, the above paints a mixedpicture. On a positive note, companies’ ongoing

Increase significantly (>10%)Increase slightly (1%–10%)

20

0

40

60

80

100

Media/entertainment

s

Consumer products/retail

Health care Technology/IT Industrialgoods

Telecommunications Financialservices

EnergyAutomotive

28

56

84

30

45

75

33

42

75

29

43

72

41

31

72

24

46

70

31

33

64

31

28

59

41

15

56

8 BCG SURVEY

E X H I B I T 5

DESPITE SOME IMPROVEMENT, DISSATISFACTION WITH THE RETURN ON INNOVATION SPENDING REMAINS HIGHAre you satisfied with the financial return on your investments in innovation?

SOURCES: BCG 2004 Senior Executive Innovation Survey; BCG 2005 Senior Executive Innovation Survey; BCG 2006 Senior Executive Innovation Survey.

E X H I B I T 6

INDUSTRIAL GOODS COMPANIES ARE THE LEAST SATISFIED WITH RETURNSAre you satisfied with the financial return on your investments in innovation?




20

0

40

60

80

100

2006 2005 2004

52

48

50

50

43

57

Yes No

Yes No

20

0

40

60

80

100

59

41

58

42

56

44

56

44

51

49

50

50

49

51

49

51

44

56

Media/entertainment

Technology/IT Financialservices

Energy Health care Automotive Telecom-munications


Industrialgoods

9Innovation 2006

and growing commitment to innovation shouldtranslate into a range of new and improved businessmodels, processes, products, services, and customerexperiences, benefiting companies, their share-holders, and customers alike. But at what cost?Given the apparent “black hole” nature of much ofthis spending and many companies’ significantdoubts about their ability to execute, the question

must be asked, Might some of this money be betterspent elsewhere? Phrased a bit differently and moreconstructively: What steps can, and should, compa-nies be taking to optimize their innovation spend-ing to ensure that little, if any, of the money iswasted? This is a pressing issue and one most firmswould do well to focus on, given the competitiveimplications.

10 BCG SURVEY

Driving Innovation: Objectives and Tactics

Most companies pursue innovation with one primary objective: growth. The vast majority of survey respondents—over 90 percent—considerorganic growth through innovation necessary forsuccess in their industry. (See Exhibit 7.) Andnearly three out of four agreed that “breakthrough”innovations are required to win, with automotive,technology/IT, telecommunications, and healthcare companies considering it particularly critical.(See Exhibit 8.) Hence innovation is, in the eyes ofmost respondents, their company’s lifeblood. Thequestion is how, and how effectively, are companiespursuing it?

“New and Improved” or Truly New?

Innovation comes in many forms, from the trulyrevolutionary to the almost mundane. On the newproducts and services axis of innovation, for exam-ple, it can be found in new products and servicesfor new customers; new products and services for

existing customers; improvements to existing prod-ucts; and cost reductions to existing products. Ofthese four possibilities, specifically, which do ourrespondents consider most valuable and worth pur-suing? New offerings for existing customersnotched the highest rating, with 71 percent ofrespondents deeming it “important” or “extremelyimportant.” (See Exhibit 9.)

Yet when it comes to allocating resources, respon-dents said they concentrate most heavily on improv-ing existing products and services. (See Exhibit 10.)Perhaps an implicit calculation is being evidencedhere. Given the inherent difficulties of creating anentirely new product or service (cost, time to mar-ket, intellectual-property concerns, branding, etc.),let alone a winning one, companies may be quietlydeciding to weight incremental innovations (thesurer bets) more heavily, believing this the mostpractical choice on a risk-adjusted basis. Yes, everyone wants to develop, and pays lip service to

E X H I B I T 7

MOST COMPANIES CONSIDER ORGANIC GROWTH CRITICAL TO THEIR SUCCESSAgree or disagree: Organic growth through innovation is essential for success in my industry.



Agree Strongly Agree

20

0

40

60

80

100

Industrialgoods

Media/entertainment


Automotive Health care Technology/IT Telecommuni-cations

Financialservices

Energy

47

50

97

34

60

94

49

45

94

34

59

93

29

63

92

33

58

91

44

47

91

53

34

87

46

27

73

11Innovation 2006

E X H I B I T 8

BREAKTHROUGH INNOVATIONS ARE SEEN AS A NECESSITY TO WINAgree or disagree: Breakthrough innovations are necessary for success in my industry.



E X H I B I T 9

EXECUTIVES PLACE A PREMIUM ON NEW OFFERINGS FOR EXISTING CUSTOMERS. . .Rate the importance of the following types of innovation:



Agree Strongly Agree

20

0

40

60

80

100

Automotive Technology/IT Tele-communications

Health care Media/entertainment

Consumerproducts/

retail

Financialservices

Industrialgoods

Energy

48

38

86

37

48

85

42

42

84

35

48

83

37

39

76

36

30

66

41

25

66

32

32

64

28

28

56

Extremely important Important

20

0

40

60

80

New products/ services for

existing customers

Improving existing

products/services

New products/ services for

new customers

Reducing product/ service cost

71

9

62

66

13

53

62

19

43

59

29

30

12 BCG SURVEY

developing, the next product that “defines a market,” the next iPod. But in the end, when itcomes down to actually committing resources, mostcompanies seem to be playing the percentages.

Where to Invest?

Companies are increasing their emphasis on rapidlydeveloping economies (RDEs). Approximately 45percent of respondents said their companiesplanned to increase R&D investments in China, withautomotive and consumer products and retail com-panies planning the biggest percentage increases;an equal number planned to boost investment in India, led by technology and IT firms. (SeeExhibit 11.) Smaller percentages planned to boostspending in Eastern Europe, Latin America, andother RDEs. Combined, these intentions represent anoteworthy shift, or acceleration, in allocations, as in2005 only a third of respondents said they expectedto raise their investments in these countries.

In terms of why companies are raising their RDEallocations, the most commonly cited reasons, notsurprisingly, were the potential cost savings andenhanced ability to develop products and servicesfor local markets. (See Exhibit 12.) Consistent withthe latter objective, product development was thewinner when respondents were asked to identifywhich elements of their innovation chains werebeing targeted via specific country investments, fol-lowed by product design and idea generation,respectively. (There are few signs, yet, of a majorshift of higher-value-added activities—those thatcommand the highest salaries and are of most con-cern to policymakers in government—to RDEs.)Clearly, companies believe a bigger on-the-groundpresence is necessary to fully tap demand in these markets, particularly the massive and rapidly growing markets of India and China. (See Exhibit 13.)

E X H I B I T 1 0

. . .BUT SPEND MOST HEAVILY ON IMPROVEMENTS TO EXISTING OFFERINGSWhat percentage of your innovation-related resources is devoted to the following activities:



20

0

40

New products/services for

existing customers

Improvingexisting

products/services

New products/services for

new customers

Reducing product/service cost

28

32

20 20

13Innovation 2006

E X H I B I T 1 1

COMPANIES ARE INCREASING THEIR INNOVATION INVESTMENTS IN CHINA AND INDIAMy company is planning to increase the amount of R&D it conducts in...



E X H I B I T 1 2

COST SAVINGS AND PROXIMITY TO LOCAL MARKETS ARE DRIVING INVESTMENT IN RAPIDLY DEVELOPING ECONOMIESIf you are increasing R&D spending in RDEs, what is the primary reason for doing so?


China India

20

0

40

60

80

Automotive Consumer products/ retail

Technology/ IT Media/entertainment

Industrialgoods

Health care Telecommunications Financialservices

Energy

6064

58

37

57

67

5248

50 5047 47

32 3329

38

23

18

0 20 40

Percentage of respondents who agree

34

32

21

8

5

Other

Access to R&D talent

Cost savings

Potential for around-the-clock

product development(time-zone advantages)

Enhanced ability to develop products and

services for local markets

Regarding these planned allocations, however, itwould be an overstatement to say that companies inaggregate have made an aggressive, full-scale com-mitment to RDEs. Most firms, instead, continue totake a quite measured approach. Indeed, thelargest target for increased innovation spending in

2006, according to our respondents, was NorthAmerica, with fully 60 percent of respondents saying their companies planned to raise invest-ments there versus last year’s levels. And WesternEurope was the second most popular destination, at48 percent.

14 BCG SURVEY


Is your company planning toincrease the amount of R&D it

conducts in...If so, which parts of innovation will be affected?

Country/region Yes

U.S./Canada 60%

Western Europe 48

India 45

China 45

Eastern Europe 27

Latin America 23

Other 20

E X H I B I T 1 3

WHERE COMPANIES ARE INVESTING, AND WHYNorth America is the main destination; product development is the main activity in RDEs.

Basic research Idea generation Product designProduct

development

24% 36% 33% 36%

19 26 24 26

15 15 19 27

14 14 16 26

7 8 8 14

6 10 9 12

4 5 5 6

15Innovation 2006

Execution: Weaknesses and Strengths

As noted, nearly half of the executives whoresponded to our survey are dissatisfied with theircompany’s return on investments in innovation.What do they consider the biggest problem spots?The most frequently cited hurdles were develop-ment times that are too long, a lack of coordinationwithin the company, not enough insight into cus-tomers, and a risk-averse corporate culture.Difficulty in selecting the right ideas and a shortageof great ideas generally were also common laments.(See Exhibit 14.)

The issue of measurement—how to gauge, orattempt to gauge, returns on innovation—wasanother obstacle cited by many respondents. Quitea few companies, in fact, have essentially thrown inthe towel: only half of respondents said their com-panies use metrics to assess the performance oftheir innovation processes. And among companiesthat do use metrics, most use only a handful. Andfew of those firms are confident they’re even using

the right ones. (See our companion report,Measuring Innovation 2006, for a more detailed look at how companies are addressing the issue of measurement.)

Innovation is, undoubtedly, hard to measure. Whileafter-the-fact analysis (e.g., determining the per-centage of successful products launched) can bestraightforward, it is much harder to assess, withany degree of confidence, the potential outcomesof the many forward-looking decisions executivesare faced with when attempting to drive innovation.Questions such as Is our innovation spending goingto give us enough growth to deliver on our total-shareholder-return objectives? and Is our organiza-tion taking enough risk in the innovation initiativesit has under way? defy easy answers.

Despite the many uncertainties, however, it isimportant to try to assess, at the outset and on anongoing basis, the likely impact of different

E X H I B I T 1 4

LENGTHY DEVELOPMENT TIMES AND LACK OF COORDINATION ARE MOST COMMON OBSTACLESIf you are not completely satisfied with the return on your investments in innovation, what are the obstacles you face?


0 20 40

32

28

26

25

21

20

18

17Ineffective marketingor communications

Development times that are too long


A shortage of great ideas

No good way to measure

Difficulty selectingthe right ideas

Risk-averse culture

Limited customer insight

Lack of coordination

16 BCG SURVEY

approaches to managing the innovation-to-cashprocess. Many companies find that an effective wayto do this is by examining the cash curve of an inno-vation. The curve depicts the cumulative cashinvestments and returns (both expected and, overtime, actual) for an innovation over time, runningfrom the very beginning of development until thepoint at which the product or service is removedfrom the market. The information that goes into acash curve isn’t perfect (how could it be?), but useof the curve brings the many implicit choices,assumptions, and decisions that management teamsmake out in the open and fosters discussion. Otheranalytical approaches—net present value, optionanalysis, etc.—are obviously important and shouldbe used in conjunction. But the cash curve brings

the underlying thinking to light in a way thatspreadsheets can’t and, in doing so, improves thequality of decision-making. (See Exhibit 15.)

While respondents found numerous areas of weak-ness in their companies’ innovation capabilities,they also identified strengths. Fully 75 percent ofrespondents considered executive sponsorship ofprojects a strength; developing deep customerunderstanding (69 percent) and providing strongproject-team support (67 percent) were also identi-fied by many as strong suits. A significant number ofrespondents (61 percent) also believed their com-panies had established a culture that supports innovation. (See Exhibit 16.)

E X H I B I T 1 5

THE CASH CURVE OF INNOVATION—AND THE SIX LEVERS TO IMPROVE ITThe curve must be managed as a coordinated, end-to-end process.

SOURCE: BCG analysis.

Product 1

Product lifecycle

Cumulativecash

Time toscale

Support costs

Portfoliomanagement

Start-upcosts

Speed to market

Product 1

1 Ideas

3

2

4

5

6

Productdevelopment

Product inmarket

17Innovation 2006

E X H I B I T 1 6

EXECUTIVE SPONSORSHIP AND CUSTOMER UNDERSTANDING ARE CONSIDERED GREATEST STRENGTHSHow strong is your company’s current performance in each category?



Strong Not sure Weak

20

0

40

60

80

100

Executivesponsorshipof projects

Developingcustomer

understanding

Providingproject-team

support

Fostering aninnovative

culture

Providingsufficientfunds forprojects

Securing earlyinvolvement of

downstreamfunctions

Sustainingmarketing

supportbeyond launch

Enforcingprojectsuccesshurdles/

stage gates

Obtaining cross-divisional

or cross-geography

input

Moving from idea generation

to sales

Leveragingsuppliersfor ideas

75

2

23

69

1

30

67

2

31

61

1

38

60

3

37

56

6

38

54

5

41

52

5

43

52

5

43

48

6

46

43

4

53

38

7

55

Balancingrisks,

time frames, and returns

across portfolio

18 BCG SURVEY

Best in Class: The Most Innovative Companies

A relative handful of companies have dominatedour “most innovative” rankings for the past threeyears. What does it take to be consistently recog-nized by one’s peer group, and executives broadly,as a top innovator? (See Exhibits 17 and 18.)

Apple Computer

• Deep customer understanding

• Skillful blend of design and technology

• Highly effective marketing

In the case of Apple, the survey’s hands-down win-ner both this year and in 2005, success stems from alist of impressive attributes. Respondents raved fore-most about the company’s deep understanding of itscustomers, its seeming ability to, in the words of oneexecutive, “know what consumers want before theconsumers themselves know it.” Said another execu-tive, “Apple is telling its customers what’s next. It’s

not following the classic ‘market-led’ innovationpath that inevitably leads to incrementalism and‘me-too’ innovation…Customers trust Apple andview it as a lighthouse guiding them on what toadopt next. If Apple has it, it must be useful.”

Executives were nearly as complimentary aboutApple’s ability to marry technology and design.“Steve Jobs’s vision for seamless integrationbetween hardware and software, and knack forunderstanding user interfaces, drives that com-pany,” said one respondent. Said another, “Apple isvery focused on the user experience and howdesign impacts that experience. It’s tough todelight typically jaded customers in this day andage, but Apple pulls it off.” A third respondentpraised the company’s ability to deliver “high-qual-ity, user-friendly technology products that tie plat-forms, channels, and user patterns together in newways.” A fourth noted “the superior physical anduser-interaction design of its products.”

E X H I B I T 1 7

THE MOST INNOVATIVE COMPANIES Which companies do you consider most innovative?


2006 2005

1. Apple Computer 1. Apple Computer

2. Google 2. 3M

3. 3M 3. General Electric (tie)

4. Toyota Motor 3. Microsoft (tie)

5. Microsoft 5. Sony

6. General Electric 6. Dell

7. Procter & Gamble 7. IBM

8. Nokia 8. Google

9. Starbucks Coffee 9. Nokia (tie)

10. IBM 9. Procter & Gamble (tie)

19Innovation 2006

Apple drew high praise as well for its marketing,which “creates a must-have mentality that appeals tothe mass consumer.” Respondents also cited thecompany’s resilience, its “track record of having thecourage to challenge what it does as a company andreinvent itself.” Finally, they praised its culture,which one executive identified as “perhaps itsbiggest innovative success: every single person inthe company contributes to Apple’s innovation suc-cess every day.”

Google

• Steady launch of “paradigm-shifting” products

• Speed

• Innovative business model

Google garnered the number-two spot in our rat-ings in 2006, rising from an eighth-place finish in2005. Respondents were impressed by the com-pany’s ability to quickly dominate its core marketvia a superior product (“there are a lot of search

engines, and then there’s Google”) and, in theprocess, redefine conceptions of what a searchengine could be. Said one respondent, “Google haschanged the fabric of our culture—how we seek,learn, and find inspiration is all tied up in thatengine.” Said another, “Google created, opera-tionalized, and monetized the search function. Itfilled a big and unarticulated public need, becom-ing indispensable to its customers, at least for now.”

Respondents also cited Google’s ongoing push toexpand its revenue base via the launch of Gmail,Google Maps, Google Earth, and a range of otherproducts and services that “seem to literally tumbleout of its innovation pipeline.” Executives alsopraised the company’s speed. Said one respondent:“They innovate at a rapid rate in multiple dimen-sions—technologies, products, business models,geographies, and consumer groups. And their timeto market is at least an order of magnitude betterthan that of their closest competitor.” Askedanother: “Who else has so quickly come up withviable, potentially paradigm-shifting business ideas,in so many different areas, so quickly?”

E X H I B I T 1 8

INDUSTRY LEADERS, PER THEIR PEERS Which company in your industry do you consider most innovative?


Industry Company

Automotive ➡ BMW

Consumer products/retail ➡ Procter & Gamble

Financial services ➡ ING Bank

Health care ➡ Genentech

Industrial goods ➡ 3M

Technology/IT ➡ Google

Telecommunications ➡ NTT DoCoMo

Executives also praised Google’s culture, which isgeared toward “constant innovation” and “encour-ages and rewards even unsuccessful innovationideas due to the learning benefit that can comefrom them.” Said one respondent, “Google hasbuilt reinvention and creativity into the core valuesof the company.”

3M

• Lengthy track record of successful innovation acrossmultiple industries

• Institutionalized capabilities

• Supportive culture

Culture figured prominently in executives’ com-ments on 3M as well. Respondents praised the com-pany in particular for its end-to-end commitment toinnovation (“the whole company, from top execu-tives on down, is fully involved”) and for providinga conducive, “enabling” environment (“3M gives itsemployees time to work on, develop, and test theirideas” and “has a high tolerance for error”). Theyalso cited the firm’s deep customer understandingand speed to market, with one respondent high-lighting its “fast product-diversification process andfast adaptation of its product portfolio to threatsimposed by the digital media revolution.”

But the bulk of respondents’ comments centered,not surprisingly, on 3M’s remarkable long-termtrack record, its ability to successfully innovate yearin and year out. “3M is a continuous innovator thathas operationalized a model that consistently deliv-ers new products that change people’s lives,” saidone executive. Another cited the company’s “con-sistent innovation across a range of industries overtime.”

Toyota Motor

• Consistent industry leader in innovation

• Deep customer understanding

• Continuous investment in innovation capabilities

Toyota is another company that, like Google,moved up significantly in the rankings this year,

landing in fourth place versus a fourteenth-placespot in 2005. Many comments centered on the com-pany’s pole position in the hybrid car industry. Saidone respondent, “The company is addressing thesecars seriously in terms of their engineering andstyling, which makes these products palatable toconsumers. Other manufacturers have put them-selves well behind the curve by not fully doingboth.” Another respondent, who had recently pur-chased a Toyota hybrid, said, “I’m impressed by thelevel of technical innovation, precision, and insightToyota is putting into its product.” Several otherexecutives said they consider this just the latestexample of Toyota leading the market and deliver-ing the right product at the right time. “Toyotagives the customer what he wants just when he real-izes he wants it. In the 1970s and 1980s it was afford-able reliability. In the 1990s it was comfort andimage. Now it’s guilt-free motoring, which Toyota isserving with the Prius.”

Other respondents praised the company for itsspeed (“Toyota has the ability to understand cus-tomer and market needs and can deliver on thoseneeds faster than its competitors”), its willingness totake risks, and its continuous investment in, andimprovements to, its processes, skills, and technol-ogy. Indeed, said one respondent, “Toyota is alwaysthe first with new manufacturing technologies andleading-edge business models.”

Microsoft

• Staying power

• Ongoing and successful expansion into new arenas

• Products that allow it to “lock in” markets

Though its size and dominance capture the bulk ofthe media attention, give credit where credit is due:Microsoft remains one of the most innovative com-panies out there. Respondents noted its stayingpower (“They somehow manage to keep a verystrong product-development pipeline despite every-body else in the world shooting at them”), ongoingforays into new markets (“The company is con-stantly expanding into other markets and valuechains”), and ability to “lock in” those markets withinnovative products and peripherals. Respondents

20 BCG SURVEY

also praised Microsoft for its customer knowledge(“They’re not always first, but they listen to cus-tomers or they wouldn’t have the market share theyhave”) and ability to commercialize not just its ownideas but those generated beyond its walls.

But the most telling comments centered on thescale and scope of the company’s reach and the

speed with which it attained it. Said one respon-dent, “Microsoft has a complete and total ability tocapture and retain an immense customer base. Weneed to figure out how to innovate our offering todo the same.” Summed up another, “The speed withwhich Microsoft has infiltrated the lives of theglobal population in a useful, practical way is noth-ing short of an innovation miracle.”

21Innovation 2006

22 BCG SURVEY

Taking Innovation to the Next Level

Companies have a range of levers they can use toimprove their innovation capabilities. Three thatwe are asked about most often in our discussionswith executives, and that surfaced repeatedly as keyconcerns in survey responses, are globalization,organization, and leadership. We’ll touch on someimportant elements of each.

Globalization

Nearly 70 percent of respondents said that global-ization is having a major impact on how their com-pany approaches innovation. And indeed, manycompanies are increasingly utilizing RDEs in theirinnovation processes. The general arguments fordoing so are compelling and hardly need restating:access to a vast pool of high-quality, low-cost techni-cal talent; potentially faster product-developmenttimes; and better access to the local markets, whichhappen to be among the fastest-growing sources ofdemand in the world.

Yet while many companies are raising their expo-sure to and investment in RDEs, few are movingquickly or with enough commitment. This comeswith a price tag. In terms of serving local demand,there are clearly early-mover advantages—imaginethe benefits of establishing a dominant presence inBeijing or Guangzhou versus a token one—and pro-portional disadvantages for companies that wait.The labor-cost differential is also very large and veryreal, and companies that delay in capitalizing on itare simply watching potential profits disappear.And holding off on investments that promisegreater speed to market is throwing a wet towel onrevenue growth.

In addition to moving more quickly and with greaterconviction, however, companies also need to expandtheir thinking on what RDEs’ skilled labor pool can accom-plish for them. In particular, companies are underap-plying this talent to such areas as basic research andidea generation. Think of what 15 or 20 Ph.D.’s—ormore—devoted to a specific research or design chal-lenge could achieve, and in what time frame, versusyour current one or two. The possible gains in out-put and productivity per dollar invested are indeed

vast and represent a potentially powerful source ofcompetitive advantage.

If your company is still holding back regarding itsinnovation-related stake in RDEs, it’s time to recon-sider. Identify the stumbling blocks to a bigger com-mitment to these countries—on-the-ground logis-tics, internal resistance, necessary changes incompany-wide alignment, etc.—and map out plansto overcome them. (For more on the topic, see“Globalizing R&D: Knocking Down the Barriers”and “Globalizing R&D: Building a Pathway toProfits,” articles from our BCG Opportunities forAction series.)

Organization

There is no single best organizational structure forinnovation. Indeed, almost any company, regardlessof size, shape, culture, or hierarchical structure,can be innovative, as the wide range of firms thatpopulate our “most innovative” list illustrates. Thecritical, elusive ingredient is alignment—having theentire organization on the same page concerningobjectives, tactics, and ultimately commitment toinnovation.

How can companies create that degree of align-ment? In our experience, it pays to focus on severalkey areas. The first falls under the banner people.Organizational alignment requires, at its base,employees who understand the value of workingtogether and have the skills and temperament to doso. Empower and reward your strongest players;simultaneously, identify those individuals who comeup short and work with them. Give them clear anddirect feedback, and take appropriate action as nec-essary. There is no room for silos of any type,whether geographic, process, or functional. Oursurvey suggests that such silos remain quite com-mon—indeed, nearly half of respondents consid-ered their companies weak at “obtaining cross-divi-sional or cross-geography input” in thedevelopment of ideas, and 38 percent consideredtheir company’s ability to “secure early involvementof downstream functions” poor. Clearly there ispotential for improvement.

23Innovation 2006

A second area ripe for an upgrade in most compa-nies is measurement. If you don’t measure innova-tion, it tends to get overwhelmed by things that doget measured and that immediately impact the bot-tom line—a case of “the urgent crowding out theimportant.” Companies should thus institute—anduse—a range of measures to evaluate all key aspectsof their innovation processes: inputs (for example,staffing and capital and operating expenditures);performance (for example, cycle times and successratios at different process gates); cash payback; andindirect benefits, such as impact on the brand. Butmore important than finding exactly the rightmeasures is finding, and beginning to use,measures that are merely not too “wrong.” Pick afew and get started tracking. Look at them overtime and you’ll see what’s working and what isn’t.You’ll then have the necessary knowledge to acteffectively.

A third key area to focus on is the environment.Companies should take pains to ensure that theconditions that help people be more innovative,especially in the idea-generation phase—such asmotivation, space to explore, the opportunity todevelop deep domain knowledge, and time tothink—are present. Time, in fact, may be the great-est luxury. Many of the efficiency- and productivity-enhancing steps that companies have taken overthe past decade have sharply trimmed the timeavailable for people to simply think. Jobs that cen-tered on pondering longer-term, big-picture issueshave been eliminated, and free time that mighthave been devoted to thinking has been scaleddown generally as employees at all levels have takenon more and more responsibility. Most executiveswe’ve polled say they don’t have time to think aboutmuch beyond their day-to-day activities. In fact, ourstudies suggest that most white-collar workers spendless than 5 percent of their time on activities thatcould foster new ideas or insights.

It is hard for an organization to be innovative underthese conditions. Yet there are options, and innova-tive companies allow and even encourage theiremployees to spend time thinking about newthings. Samsung, for example, which recentlylaunched a major innovation initiative, encouragesits designers to look for ideas outside the company,and gives them one afternoon off a week to do so.

Bosch also gives its department managers andgroup leaders dedicated time each week to let cre-ativity gel.

Consider focusing on this one element—time—as afirst step toward creating a more innovative environ-ment. Find a way to give your people, or at leastsome of your best people, some creative downtime.You might be surprised at what they’ll come up with.

Leadership

Strong leadership is ultimately the key driver ofinnovation. Without it, a company is likely tofounder. Most senior leaders recognize the signifi-cance of their role and take it quite seriously;indeed, when respondents were asked to identifythe person who is the biggest driving force behindinnovation at their company, the CEO was the easywinner. (See Exhibit 19.) Yet it’s worth noting thatthe majority of respondents—55 percent—pickedsomeone other than the CEO in response to thequestion. There are, of course, many potential rea-sons for the choice of someone else—someone with“innovation” in his title, for example. But if theCEO (or chairman) is not the primary driver, and ifnot everyone in the organization is aware of howimportant innovation is to that leader, there aregoing to be real questions about the sustainabilityand ultimate success of the company’s innovationefforts.

Symptomatic, and also undoubtedly a cause, of thiscondition is the often-large disconnect between theperspective of the chairman/CEO on innovationand those of the rest of the company, a theme oursurvey has revealed each year. In short, chairmenand CEOs typically have a much rosier view ofthings. Eighty percent of chairmen and CEOs, forexample, believe their companies have a corporateculture that promotes innovation; only 51 percentof non-executives share that opinion. Seventy-sixpercent of chairmen and CEOs feel that their sen-ior management team has a common perspectiveon how to manage innovation and measure its suc-cess; only 58 percent of non-executives agree.Ninety percent of chairmen and CEOs view innova-tion as one of their company’s top three strategicpriorities; only 67 percent of non-executives do.(See Exhibit 20.)

24 BCG SURVEY

E X H I B I T 1 9

THE CEO IS THE PRIMARY DRIVER OF INNOVATIONWho is the biggest force driving innovation at your company?


E X H I B I T 2 0

A DISCONNECT BETWEEN SENIOR LEADERS AND THE REST OF THE COMPANY? Where does innovation rank among your company’s strategic priorities for 2006?



0 2010 30 5040

CFO

CEO


CIO

VP of innovation

COO

Other VP

Head of R&D

Head of sales/marketing

Chairman

Other

45

17

12

8

6

4

3

3

1

1

Chairman/CEO Other C-Level (1) Other

0

20

40

60

80

100

49

41

82

27

40

25

8

45

41

12

2

Top priority

Top 3

Top 10

Not on the list

39

26

9

26

(1) Includes chairmen, CEOs, presidents, CFOs, CIOs, COOs, and CTOs.

Chairmen and CEOs, and leaders generally, obvi-ously need to do a better job of establishing theircredibility regarding their commitment to innova-tion. Words alone are not enough, though regular,consistent communication is certainly a big part ofit. The strongest messages, the ones employees willtake to heart, come from the combination of wordsand actions, the day-to-day activities that signal com-mitment or lack thereof. Employees need to notonly hear about but see commitment to objectivesand initiatives, and they need to see it on a consis-tent basis. Where is the chairman/CEO spendinghis time? What is the company investing in? Thesesend the clearest, most believable signals, the onesthat will either inspire the firm or deflate it.

And a key part of this is patience. It can take time—often two or three years, in our experience—toalign the entire organization around its strategy ofinnovation. Chairmen and CEOs must persist andnever back off, as the battle is won cumulativelyrather than in one quick burst. And the forcesarrayed against becoming more innovative—iner-tia, fear of risk taking, an intolerance for neededambiguity, the tyranny of quarterly results, etc.—aremany.

* * *

Executives always ask us how they can make nextyear’s list of most innovative companies. The paththere is clear but not easy to negotiate. As a leader,ask yourself the following questions to see whereyour organization is on its journey and where youneed to help:

• Is innovation really one of the critical elements ofmy company’s overall business strategy? What roledoes it need to play?

If innovation is not a top strategic priority, that’sokay. But you shouldn’t expect to be very innovative.

• Do I rigorously track the cash payback from mymajor innovations? Do I make key assumptionsclear and invite rigorous debate? Is my manage-ment team in agreement on what’s important todrive cash?

Innovation is all about cash payback. Drawing anddiscussing cash curves can help keep the focus there.

• Do I understand the impact that globalization ishaving, and will have over the next one to threeyears, on my innovation activities?

RDEs offer sizable advantages and are underex-ploited by most companies. The most innovative com-panies realize the potential and carefully, but aggres-sively, leverage it.

• Do the people in my company believe that ourorganization is aligned around innovation? If not,what specific elements are out of alignment?What are we aligned around?

Lack of organizational alignment is perhaps thebiggest obstacle most companies face. A confusedorganization, one that receives mixed messages, isvery unlikely to be innovative.

• What specific actions have I taken today, this week,and this month to improve my organization’s abil-ity to innovate and generate the required paybackfrom those activities and investment? What do myactions say about my priorities?

Innovation flourishes under and requires strongleadership. The most innovative companies have aleader who wants to make a difference and leave alegacy around innovation.

25Innovation 2006

26 BCG SURVEY

The BCG 2006 senior management survey on innovation was distributed electronically to executives world-wide in early 2006. In total, 1,070 executives and managers participated, representing 63 countries and allmajor industries. Participation was voluntary and anonymous.

The responses broke down as follows:

Survey Methodology

Country:

United States 450

India 71

Germany 66

France 42

United Kingdom 39

Portugal 30

Switzerland 25

Australia 23

Spain 22

Canada 20

Mexico 20

Italy 19

Brazil 19

Netherlands 18

Chile 18

Singapore 17

China 15

Other 156

Total: 1,070

Industry:

Technology 191

Consumer products/retail 140

Industrial goods 114

Health care 112

Financial services 111

Media/entertainment 68

Education 39

Telecommunications 37

Automotive 29

Energy 27

Government/non-profit 18

Other 184

Total: 1,070

27Innovation 2006

Position:

Chairman/CEO 217

Business unit leader 92

Director of Strategy 88

Vice President of Sales and Marketing 57

Vice President of Strategy 50

Manager of New Product Development 46

Director of R&D 46

Product manager 39

Chief Operating Officer 34

Technical specialist 34

Researcher 29

Chief Technology Officer 16

Chief Financial Officer 15

Chief Information Officer 13

Other 294

Total: 1,070

28 BCG SURVEY

For More Information

This survey is part of BCG’s extensive work and research on innovation and the innovation-to-cash process.A sample of related publications includes the following:

• Measuring Innovation 2006, BCG Senior Management Survey

• Innovation 2005, BCG Senior Management Survey

• “Making Innovation Pay,” BCG Perspectives

• “Innovating for Cash,” Harvard Business Review

• “Spurring Innovation Productivity,” BCG Opportunities for Action

• “Globalizing R&D: Knocking Down the Barriers,” BCG Opportunities for Action

• “Innovation to Cash: Orchestrating in the Consumer Industry,” BCG Opportunities for Action

For copies of the above publications, please send an email to [email protected].

For more information on this survey or BCG’s broader thinking on innovation, please visit the Web site ofthe BCG Innovation Institute (http://innovation.bcg.com), send an email to [email protected], or con-tact any of the following leaders of our practice:

Innovation and CommercializationTopic AreaJames P. AndrewSenior Vice President and DirectorWorldwide [email protected]

Operations Practice AreaHarold L. SirkinSenior Vice President and DirectorGlobal [email protected]

ASIA-PACIFIC

BEIJING

David C. MichaelSenior Vice President and [email protected]

MUMBAI

Paresh VaishVice President and [email protected]

NEW DELHI

Arindam BhattacharyaVice President and [email protected]

SHANGHAI

Jim HemerlingSenior Vice President [email protected]

SYDNEY

Patrick ForthSenior Vice President and [email protected]

TOKYO

Hirotaka YabukiVice President and [email protected]

REGIONAL TOPIC EXPERTS

29Innovation 2006

THE AMERICAS

ATLANTA

Mark KistulinecSenior Vice President and [email protected]

BOSTON

Massimo RussoVice President and [email protected]

CHICAGO

Paul GordonSenior Vice President [email protected]

Petros [email protected]

DETROIT

Xavier MosquetSenior Vice President [email protected]

Eric [email protected]

LOS ANGELES

Steve MatthesenVice President and [email protected]

NEW YORK

Kim WagnerVice President and [email protected]

SAN FRANCISCO

Sebastian DiGrandeVice President and [email protected]

Sumeer [email protected]

TORONTO

Tom KingVice President and [email protected]

EUROPE

BRUSSELS

Renaud Amiel Vice President and [email protected]

DÜSSELDORF

Sebastian EhrensbergerVice President and [email protected]

Andreas MaurerSenior Vice President [email protected]

HELSINKI

Harri AnderssonSenior Vice President [email protected]

LONDON

Andy MaguireVice President and [email protected]

MADRID

Anthony PralleSenior Vice President [email protected]

MILAN

Massimo BusettiVice President and [email protected]

MOSCOW

Vladislav Boutenko [email protected]

PARIS

Mark FreedmanSenior Vice President [email protected]

STOCKHOLM

Per HalliusSenior Vice President and [email protected]

WARSAW

Kevin WaddellVice President and [email protected]

REGIONAL TOPIC EXPERTS

THE BOSTON CONSULTING GROUP

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