Marketing Innovation drives Market Leadership

Marketing executives have limited dollars and resources to invest on marketing programs and create market share growth. How do they pick the optimal go-to-market strategy to achieve market leadership? What markets do they invest into and how much? How do they create Marketing Innovation so that they are maximizing the marketing investments and generating higher revenue today and in the future?

The markets can be divided into five broad categories including Growth market, Emerging market, Existing market, Replacement market and Untapped market to create the appropriate context.

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

1. Growth market:

a. Growth market is the market where the organization is seeing the most business traction today. The marketing executive needs to first answer the following questions to establish the baseline: What is our current market share in the Growth market? Who are our prime customers? Why are the customers using our products? For how long? Do we provide an effective solution? Are we winning? Why are we winning? Who are we winning against?
b. The marketing executive also needs to determine the Growth market trends. Whether the Growth market is going to grow further. And determine whether the organization is growing at the pace of the Growth market or faster than the pace of the Growth market.
c. At this point an internal analysis of marketing programs that have worked well to get us to this position in the Growth market is needed. The marketing executive needs to determine what has worked and what has not. And why?
d. Now, the key question needs to be addressed on how marketing department can accelerate the business in this Growth market? Whether the department can create an assembly line of marketing programs to accelerate the growth in this market, and rapidly scale. What does the department need to create the assembly line?
e. Finally the department needs to determine the marketing tools, sales collateral and techniques needed to create the demand in the Growth market.
f. Knowing that Growth markets provide maximum revenue dollars today, minimum of 50% to 60% of the marketing investment should be focused on the Growth market. The marketing game is all about execution in the Growth markets.

2. Emerging market:

a. Any market where the organization is seeing an early traction is an Emerging market. The questions that the marketing deparment need to address are: Why are we seeing the early traction? For how long? Do we have an effective solution? Are we winning? Are there competitors prevalent in this market?
b. Now, the marketing department needs to determine whether the Emerging market is a new industry, a new geography, a new vertical, a new user, or a new application of our product.
c. At this point, market sizing and trending is needed. Is there a larger market here beyond the Emerging market? How big is the size of the potential Emerging market? What is the potential growth of this Emerging market? How can we win in this Emerging market? Again, marketing needs to have answers to these questions.
d. The marketing department should invest into one or two emerging markets. Marketing programs for an emerging market will be more creative, innovative and ad-hoc.
e. In an Emerging Market, it is always best to create a Hypothesis. Experiment. Test the hypothesis. Change as often as needed.
f. Knowing that there is a huge upside from investing in an emerging market, minimum of 10% to 20% of marketing investment should be focused here. There is mid-term to long-term revenue potential in the Emerging markets.

3. Existing market:

a. Existing market is the market consisting of the existing, long-standing customers. First, the marketing department needs to know who the existing customers are, why they purchased company's product, how long they have been using company's product, whether they are happy customers and loyal customers, and the company's current relationship with these customers. Another key question to address is how many customers the company loses every quarter and why.
b. It is very important to understand how the existing customers are using company's products. Whether the customers are using the products to the fullest potential. This would lead to key question: Can we market more of the same products to the existing customers? This is tied to extracting the maximum life-time value from the existing customers. Marketing needs to know the maximum life-time value of the existing customers.
c. Another key question that needs to be answered is: Can the company market different products to our existing customers? How do we do this?
d. Ultimately, the marketing department needs to determine the total revenue potential from existing customers. And assess on where the business is today, and the growth potential.
e. When it comes to execution, marketing department should analyze the marketing programs for the existing customers, on what has worked well in the past, and what has not worked well.
f. Another program to consider is whether the existing customers can refer the company to more customers. And what processes need to be in place to achieve this. An estimate of the total potential market of referral customers from the existing customers is essential. Again, establishing the baseline on where the company is with referral business, and analyzing the growth potential is needed.
g. Existing customers not only bring the company maintenance and ongoing service revenue, but provide a tangible upside at a lowered investment.
h. Minimum of 15% to 20% of marketing investment should be focused here. There is short-term revenue potential in the Existing markets (unless it is completely tapped).

4. Replacement market:

There are two replacement markets. Markets that the company takes away from Competitors and Adjacent markets.

a. Competitors:

1. Marketing department needs to have a deep understanding of the direct and indirect competitors and their business. Market share analysis needs to be conducted on Competitors' current market share, and importantly whether their market share is growing, shrinking or remaining flat.
2. Competitive marketing strategy needs to be established.
3. Simply put, competitors' customers need to be identified. A key question to ask is: Are the competitors' customers satisfied? How is our own customer satisfaction?
4. Analysis needs to be conducted on why the organization loses against the competitors, why it wins against them in new business. A list of the competitors' weaknesses needs to be surfaced as part of the SWOT analysis.
5. Further research on how many customers the company has won over from the competition needs to be undertaken (takeaways) and by the same token, existing customers lost to competition (giveaways).
6. Finally, marketing department needs to creatively finds ways to access the competitor's customer base (names, titles, industries, etc.).
7. At this point, marketing department is ready to create marketing programs to win away competitor's customers. At a minimum, the program includes campaign, offer, marketing and sales tools, fulfillment, product and data conversion and integration.
8. Minimum 10% to 20% marketing investment should be aimed at competition. There is mid-term revenue potential in Competitors' markets (programs take time to execute; customers take time to convert).

b. Adjacent market:

1. Adjacent markets are markets that are either sub-sets or super-sets of the solution that the company provides. The company must know on whether it provides a complete solution to the customer's problems or only a subset. For instance, the solution could be deeply embedded within a business process wherein the customer uses other technologies and products. If the company provides a complete solution, what is the strategy against those who provide only a subset? If the company provides a subset, what is the strategy to provide a complete solution? These questions need to be addressed.
2. The marketing department needs to determine the players in the Adjacent market that provide a complete solution or a subset, and whether they are potential competitors or partners.
3. Further, the marketing department needs to answer the following questions: Who are the customers? Are their needs maturing? Are they looking to upgrade and replace the other players? What is the market growth potential?
4. Finally the all-important analysis on resources, costs, profits and risks associated with entering an Adjacent market needs to be conducted. Questions such as entering the Adjacent market head-on, complementing existing players, or focus on a specific niche need to be addressed.
5. The key to execution in Adjacent Market is Experiment. Test a hypothesis. Change the strategy as often as needed.
6. Minimum 5% to 10% marketing investment should be aimed at Adjacent markets. There is mid-term to long-term revenue potential in the Adjacent markets (creating a strategy, executing and attracting customers will take time).
9. Executing marketing programs for adjacent markets require opportunistic measures and entrepreneurship.

5. Untapped market:

a. Untapped market is where the company has zero business and no traction. Marketing department needs to determine the Untapped markets, and reasons on why the company has not created any business in these markets.
b. Marketing has to answer the following questions: Can we tap into this market? What is the investment required? What is the available market?
c. Competitive analysis needs to be conducted on whether the competitors have already tapped into this market, and why.
d. As part of execution, marketing needs to think about creating beachheads, and whether the company can leverage their mindshare to build and create this market.
e. Since Untapped market is brand new, a key question on market entry needs to be analyzed: entering with partners or going direct.
f. Marketing department needs to think about creating opportunistic mechanisms to explore the untapped market, and should be willing to change them often.
g. Minimum 1% to 5% marketing investment should be aimed at untapped markets. There is long-term revenue potential in this market.
h. Untapped market is where companies evolve, become great companies and bring in new revenue and market share. Investing into untapped markets is high risk, high reward strategy.

Marketing Innovation requires strategy, disciplined execution, and entrepreneurship (especially outside Growth markets). Marketing Innovation can create significant market leadership for organizations that put all the marketing wheels in motion.

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia...Learn more Download Now

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

Originally published in 2006. Republished in 2009.

Intuit - Creating Innovations in Software Industry

Creating Innovations in Software Industry

Intuit (NASDAQ: INTU), the world's largest maker of financial management and tax software, is now branding itself as the Small Business software company with the goal of helping businesses to "start, run & grow" fast. Intuit is best known for the household software brands Quicken, QuickBooks and TurboTax created for small businesses, consumers and accountants. The company's mission was to "create new ways to manage personal finances for small businesses that are so profound and simple, customers cannot imagine going back to the old way," driven by "Right for My Business" strategy.

Today's Intuit is different with it's vision of "Going Beyond Innovation"

"Innovation is nothing new at Intuit. It's been our heartbeat for nearly a quarter century.

As the world evolves, so has Intuit, driven by the passion for inventing solutions to solve important problems, perfecting those solutions and delighting its customers. Intuit started small in 1983 with Quicken personal finance software, simplifying a common household dilemma: balancing the family checkbook. Little more than two decades later, Intuit's revenue tops $3 billion, being publicly traded on the Nasdaq Stock Market, and recognized as America's most-admired software company and one of the country's best places to work."

Source: Intuit.com Corporate Profile

Today, Intuit is creating a greater array of "Right for Me" customer-driven products and services to help manage a broader array of small businesses.

Despite the Great Recession, Intuit has been handily beating the earnings estimates for the past 4 quarters with an average Surprise percentage of an amazing 21.1%:

Earnings History	Jan-09	Apr-09	Jul-09	Oct-09
EPS Est	0.27	1.61	-0.12	-0.16
EPS Actual	0.34	1.68	-0.10	-0.10
Difference	0.07	0.07	0.02	0.06
Surprise %	25.9%	4.3%	16.7%	37.5%

Source: Yahoo Finance

Not just earnings, if you take a look at Intuit's revenue growth, it is good, averaging over 7% percentage year over year since 2007. As a matter of fact, the quarterly revenue growth is now accelerating further:

PERIOD ENDING		31-Jul-09	31-Jul-08	31-Jul-07
Total Revenue		3,182,537	3,070,974	2,672,947
Cost of Revenue		676,848	624,258	509,446
Gross Profit		2,505,689	2,446,716	2,163,501

Source: Yahoo Finance

The analysts are quite bullish on Intuit's stock performance for the next 12 months, with a current closing price of 30.03:
PRICE TARGET SUMMARY

Mean Target: 34.21 Median Target: 34.00 High Target: 40.00 Low Target: 29.00 No. of Brokers: 14

Data provided by Thomson/First Call

Intuit is focused on "Delighting the Customers" using the following principles:
Grow our customer bases
• Subscription: # customers
• Non-Sub: # current per. buyers

Offerings are recognized leaders at delighting our customers…

• Net Promoter scores >10 pts better than nearest alternatives
• Reduce controllable attrition

Develop innovative offerings to solve important customer problems
•# customers using new offerings launched in last 3 years

Source: Intuit Investor Day Presentation

Intuit is poised to deliver sizable new innovations in the near term:

New product pipeline 5x 10 year average

• Producing results:
• Mobile:7 launched; 17 in R&D pipeline
• Payments:12% of units sold on apps

How does Intuit innovate & delight the customer?

Intuit applies two core capabilities today:

1. Apply a customer centric mindset and CDI methodology using direct observation and savoring the surprises to:
Create clarity around target user(s)
Develop deep understanding of their dreams, work flows & key pain points

2. Apply design-for-delight principles to evoke positive customer emotion by:
Developing offerings that address large unmet or underserved needs…
…that are dramatically easier to use or a better value than alternatives
… helping end users save or make money (better money outcomes)

"Inside Intuit" authors Suzanne Taylor and Kathy Schroeder elaborate on how Intuit created Innovations in the Software Industry, warded off Microsoft, and achieved sustaining market leadership.

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

Here are the top five Innovations that Intuit created to achieve small business software market leadership:

1. Customer Evangelist Culture

Intuit ensured that the new hires understood the company's Holy Grail: A Happy Customer. Customer focus, wherein Intuit makes a difference in the customers' lives, is the everyday Mantra practiced by everyone at Intuit. Practices such as interviewing and hiring the right employees who believe in customer first, postage-paid "Customer suggestions" included with every copy of software (and follow through on the suggestions), answering service and technical support calls for at least four hours each month, "Follow Me Home" research wherein marketing and engineering staff literally follow a customer home and watch them install and use the software, database to track continuous customer feedback, customer advisory panel consisting of loyal customers providing feedback on new products, features and quality, and focus groups to conduct market research on how customers buy and use software (to manage money and finances).

These are just few of the Innovative mechanisms that Intuit installed to create an Industry first Customer Evangelist Culture that resulted in tremendous customer loyalty and market share growth.

2. Customer-Intuitive Design

By talking directly to prospective and ultimately current customers, Intuit founders and product managers built a deep understanding of exactly what the customer needs and pain points were. This led to defining software products to solve these fundamental customer needs. Whereas most software makers before Intuit were focused on creating "complex" software with an elaborate set of features that customers hardly ever used (and were confused), Intuit created new innovations in software design by creating software that a customer really cared for, and can benefit from on an everyday basis. Intuit engineers and product managers will go at lengths to understand the customer's mindset - from buying, to installing to using software, and becoming a loyal customer.

3. Customer-driven Marketing and Product Management

Most of the Software Industry before Intuit saw Marketing's role as marketing communications and brand marketing. However, Intuit realized early on that the marketing department must contribute as the company develops new products. And the role of Product managers was born wherein the Product Managers act as product business managers, oversaw income statements and all aspects of building the business. According to Scott Cook, the co-founder of Intuit, product managers must act as "champions of their products, embodying the voice of the customer not just for product development and marketing communications, but also for technical support, and overseeing the critical feedback loop between technical support and product development." Marketing also assisted the "Product Launch", wherein besides managing advertising, public relations and upgrade mailings, Marketing also created internal launch readiness, trained technical support and customer service, and created financial forecasts for the sales volumes for operations and planning.

4. Direct Marketing and Retailing

Although other software makers had tried direct marketing before, Intuit placed a big bet in their early days and want all out on their Direct Marketing campaign: "End Financial Hassles. $49.95" The Direct Marketing campaign targeted ads in three major magazines, slashed the price of Quicken in half, provided no copy protection, and was tied to wholesale distribution - all firsts for a software company. This resulted in huge sales and sustained the growth of Intuit. Intuit introduced "National Sales Tour" wherein employees visit the retailers and retailers' customers. This mitigated channel conflicts, brought employees closer to retailers and the customers, and created greater awareness of customer's buying habits - or as Cook put it, an all important "sense of the merchant." Intuit would expand Direct Marketing into Radio and then Television, and managed its two-pronged sales strategy of retail distribution and direct to expand the market share and leadership.

5. The Process driving Innovation

Intuit that went through several ups and downs from late nineties through early 2000, eventually began focusing on the "process and culture together to drive results" under the leadership of then CEO Steve Bennett (who came from GE). According to Bennett, "Bringing some of the big company process to small company customer innovation is our biggest challenge. Innovation isn't just about ideas, because ideas without operational rigor just fall apart." Bennett established rigor throughout the company, focusing the company on the "critical few" drivers and issues. Bennett also established Six Sigma mechanisms to achieve "Process Excellence" in various company processes. For example, the customer service team reduced customer wait times by 40%, and another product team reported 70% reduction in bugs due to Six Sigma processes.

Bottomline:

Today Intuit does over $3 Billion in annual software sales, is profitable, has a market cap of over $9 billion, and is poised to achieve annual double-digit sales growth. Importantly, Intuit is capturing the small business market share through established brands including QuickBooks, TurboTax, Quicken, Lacerte ProSeries, and Digital Insight.

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia...Learn more
Download Now

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

Acknowledgments:

Suzanne Taylor and Kathy Schroeder - "Inside Intuit" - Harvard Business School Press

Originally published in 2006. Republished in 2009.

3M - The Innovation Machine

3M (NYSE: MMM) "Innovative technology for the changing world" is one of the top 20 innovators in The Innovation Index. In an earlier blog post on "Failures and Stumbles driving Innovation", we talked about how 3M has created its own Innovation Machine to stimulate growth over the last hundred plus years.

"Our company has, indeed, stumbled onto some of its new products. But never forget that you can only stumble if you're moving."

- Richard P. Carlton, Former CEO, 3M Corporation, 1950

"To the outside world, what we do looks a little like magic. We create entirely new product categories and breathe new life into markets crying for reinvention. It’s been called 'the 3M effect.' Harnessing innovation for your benefit- that’s the practical magic behind 3M’s success."

- George W. Buckley, Chairman, President and CEO of 3M

With over 76,000 employees, 3M produces over 55,000 products, including: adhesives, abrasives, laminates, passive fire protection, dental products, electrical materials, electronic circuits and optical films.^[1] 3M has operations in more than 60 countries – 29 international companies with manufacturing operations, and 35 with laboratories. 3M products are available for purchase through distributors and retailers in more than 200 countries, and many 3M products are available online directly from the company. - Source: Wikipedia

Who is 3M?
3M is fundamentally a science-based company. We produce thousands of imaginative products, and we're a leader in scores of markets – from health care and highway safety to office products and optical films for LCD displays. Our success begins with our ability to apply our technologies – often in combination – to an endless array of real-world customer needs. Of course, all of this is made possible by the people of 3M and their singular commitment to make life easier and better for people around the world. - Source: 3M Investor Relations

Since 2007, 3M stock performance is relatively flat (down about 9%), whereas S&P 500 is down more than 25%. 3M quarterly earnings have been climbing, despite the great recession, and positively surprising the analysts:

Earnings History	Dec-08	Mar-09	Jun-09	Sep-09
EPS Est	0.93	0.86	0.94	1.17
EPS Actual	0.97	0.81	1.20	1.37
Difference	0.04	-0.05	0.26	0.20
Surprise %	4.3%	-5.8%	27.7%	17.1%

On the other hand, 3M topline revenue has been relatively flat since 2007, and profits are also leveling off:

PERIOD ENDING		31-Dec-08	31-Dec-07	31-Dec-06
Total Revenue		25,269,000	24,462,000	22,923,000
Cost of Revenue		13,379,000	12,735,000	11,713,000
Gross Profit		11,890,000	11,727,000	11,210,000

However, 3M is bullish about the future - 2010 and beyond:
* Innovation is alive and well at 3M, and our growth capability is improving
* 3M sees huge opportunities for value creation –health care and emerging markets only scratch the surface
* 3M’s business model is unique and produces sustainable premium margins and ROIC
* 3M can fund growth, address fiduciary needs and return significant cash to shareholders –due to a strong balance sheet and outstanding free cash flow.

Essentials of 3M’s Growth Plan in 2010 and beyond:
Rebuilding & extending the core; lowest risk and fastest results

• Protect and defend the core; inventing a new future
• Broaden the product portfolio to become more important to customers

Invest in the future

• R&D spending increases, protecting our flanks and engaging the labs
• Fixing chronic capacity issues
• Adjacencies, Emerging Business Opportunities and

Making Supporting Acquisitions
Improving supply chain speed and efficiency

• Shortening supply chains
• Driving growth by with regional brands and manufacturing
• Releasing working capital and lowering entropy costs and the effective tax rate

Experiment with new markets

• Emerging Business Opportunities (EBOs) and other adjacencies

Greater emphasis on International markets growth

Source: 3M Investor Relations

After 100 years, 3M follows a business model based on “the ability to not only develop unique products, but also to manufacture them efficiently and consistently around the world (3M).”^[6]

Incentives - Innovations' Starting Point
In a news story in the Boston Globe titled "In some cases, nothing succeeds like failure", Gustave Manso, a Brazilian-born finance professor at MIT Sloan School of Management claims: "To induce employees to explore new ideas, you have to tolerate early failure and reward long-term success." Manso believes that "the challenge is to craft incentives that will make creative people comfortable with thinking big and taking risks."

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

The Globe story cites Manso's favorite on experimentation and intra-entrepreneurship, a story that has become both a model and a fable among the innovators: "Spencer Silver, a researcher at the St. Paul technology company 3M, discovered a new kind of light adhesive in 1968 that initially was shelved because it couldn't compete with more robust glues and had no obvious commercial application. A decade later, his colleague Art Fry recognized that the adhesive, which stuck lightly to surfaces and was readily repositioned, would be perfect for the best-selling product 3M eventually launched as the Post-it Note."

3M - Failures to Innovation Machine

3M is quite possibly the most innovative company of our times that even CEOs of other visionary companies admire. 3M is best known for its household brands such as Post-it Note, Scotchgard, Scotch tape, and many more. 3M initially failed in its mining business, and eventually stumbled onto most of the successful innovations that we know 3M for, including Post-It, Masking and Scotch tape. "Although the invention of the Post-it note might have been somewhat accidental, the creation of the 3M environment that allowed it was anything but an accident," according to Collins and Porras, authors of Built to Last.

3M institutionalized such mechanisms to drive Innovation as the "15 percent rule" - technical people spend up to 15 percent of their time on projects of their own choosing or initiative, "25 percent rule" - each division should produce 25 percent of annual sales from new products and services introduced in the previous five years (which later increased to 30 percent), "Golden Step" award - given to those creating successful new business ventures originated within 3M.

More growth mechanisms were created to stimulate internal entrepreneurship, test new ideas, create unplanned experimentation, share new ideas, develop new innovation, cross-fertilize technology, ideas and innovation, stimulate innovation via customer problems, speed product development and market introduction cycles, provide profit sharing, and promote "a small company within a big company feel" by creating small autonomous business units and product divisions -- over a dozen business processes to stimulate creativity, innovation and growth -- in early 1990 3M had over sixty thousand products and over forty separate product divisions.

Incentives for Innovation

Manso wants to create incentives such as "slow-vesting stock options, golden parachutes, debtor-friendly bankruptcy laws, and, in academia, tenure" to motivate the employees to innovate without worries about failure and job insecurity.

"Incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to motivate effort," Manso wrote in an abstract this fall. "The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for early failure."

In Blocking Creativity and Innovation on this blog, we talked about creating a system that unblocks innovation and creativity by building new processes, creating an innovation culture and rewarding and recognizing the innovators.

Five takeaways stimulating Innovation

Authors Collins and Porras summarize their findings from 3M and provide five takeaways to drive Innovation at any business:

1. "Give it a try--and quick!" - Essentially echoing on having a process to try out a lot of stuff, and keeping what really works. The key here is to do something. Keep on trying something new.

2. "Accept that mistakes will be made." - Learn from the mistakes quickly, and move on. Failures are part and parcel of what creates new innovation. Don't repeat the same mistakes.

3. "Take small steps." - Experiment, but on a small scale. When something looks promising, go all out and seize the opportunity. This way one can do plenty of inexpensive experiments that create a funnel of would-be innovations.

4. "Give people the room they need." - Without entrepreneurship, there is no experiment. Without experiment there is no success or failure. People need some time, incentives, job security and room to experiment.

5. "Mechanisms - build that ticking clock!" - How do you harness creativity and build innovation? It cannot happen simply by chance. Companies need to create practices and tangible mechanisms to experiment, try out new ideas and innovate.

Bottomline

3M has launched many new innovations in the marketplace thereby solidifying its position as a top innovator of technology governed by systematic processes and excellent manufacturing.

For instance, in November, 3M introduced a new connector for microSD cards which has the smallest form factor available, and yet provides excellent connection and locking mechanisms. 3M opens up the removable flash memory card market for phones, digital cameras, gaming and more.

Earlier, in an effort to broaden the market share in the auto industry beyond the professionals, 3M went direct to consumers, the do-it-yourselfer and car enthusiasts, with a new line of consumer care car products. 3M introduced three ready-to-use product solutions that range from better appearance and shine, to increased performance and repair.

3M is also driving Hydrogen Fuel research along with the Department of Energy, and is innovating MicroTouch capacitive TouchSense System.

China and India represent the most important growth opportunities for 3M
•China –potential to reach > $3B by 2014
•India –potential to reach > $1B
•China + India =~40% of US Economy in size with 1/8thGDP/capita

Source: 3M Investor Relations

These are just a few examples of the new innovations at 3M that are both practical and ingenious, solving the innate customer need and creating new markets and growth. As with all innovations, at times it addresses a ready market that creates immediate revenue growth, at times it creates a new market entry in an emerging market that is about to happen.

3M is one of the top 20 innovators in The Innovation Index. Although the stories of the planned failures stimulating growth at 3M are passed along by various authors who study the innovations at 3M from inside, or by company employees who go on to become innovators themselves, it would be great if 3M were also to publish an annual list of the top initiatives that failed and lessons learned from these. The rest of the industry can greatly benefit from such wisdom.

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia...Learn more
Download Now

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

References:

In some cases, nothing succeeds like failure

The Innovation Index

Failures and Stumbles driving Innovation

Blocking Creativity and Innovation

www.3m.com

Originally published in 2006; republished in 2009.

P&G - Procter & Gamble - Innovating & Growing with Business Model

Did you know that Procter and Gamble - P&G makes all these cool products below that you use everyday in your house?

You betcha... from Duracell and Gillette to Crest, Charmin to Tide, Bounty to Iams - P&G is the world's largest consumer goods company. As a matter of fact, "three billion times a day, P&G brands touch the lives of people around the world." P&G has a bigger mission that they are trying to fulfill: "Provide branded products and services of superior quality and value that improve the lives of the world's consumers, now and for generations to come."

P&G is one of the Top 20 innovators of the Innovation Index.

P&G stock is doing relatively well compared to the major indexes. Here is a snapshot of how well P&G is holding up since 2007, beating both S&P 500 and Dow Jones indices:

Why is P&G doing so well?

One answer: Innovation. Innovation driving new business, innovation driving growth, innovative leadership by past CEO of P&G A.G. Lafley, & current CEO Bob McDonald. Another fact that most investors may not know about: Barclays Global Investors and Berkshire Hathaway (Warren Buffett's company) are the top two institutional holders of P&G.

P&G has been making or handily beating the earnings estimates for the past 4 quarters (despite the Great Recession):

Earnings History	Dec-08	Mar-09	Jun-09	Sep-09
EPS Est	1.58	0.80	0.79	0.99
EPS Actual	1.58	0.84	0.80	1.06
Difference	0.00	0.04	0.01	0.07
Surprise %	0.0%	5.0%	1.3%	7.1%

(Courtesy - Yahoo Finance)

P&G Revenue & Gross Profit are beginning to climb back (check earnings results below), after divesting major businesses such as the prescription business in 2009 (courtesy - Yahoo Finance). Sales fell in 2008-2009 (yearly sales for June 2009) owing to the recession, divesting of businesses, and P&G's ill-timed strategy of raising prices for its products in the midst of the Great Recession that backfired. The price increases initially helped buoy sales, but eventually sales suffered. P&G is correcting the price increase strategy of 2008 beginning in Q3 of 2009.

PERIOD ENDING		30-Jun-09	30-Jun-08	30-Jun-07
Total Revenue		79,029,000	83,503,000	76,476,000
Cost of Revenue		38,898,000	40,695,000	36,686,000
Gross Profit		40,131,000	42,808,000	39,790,000

P&G Global Business Unit Organization

Courtesy: P&G Quarterly News. PG.com

24 of P&G's brands have more than a billion dollars in net annual sales,^[15] and another 18 have sales between $500 million and $1 billion. (Courtesy - Wikipedia). These P&G brands are run as business units, with brand heads managing the operations, products & profits.

Billion dollar brands

• Ariel is a brand of laundry detergent/liquid available in numerous forms and scents.
• Actonel is a brand of the osteoporosis drug risedronate co-marketed by Sanofi-Aventis.
• Bounty is a brand of paper towel sold in the United States, Canada, and the United Kingdom (rebranded to "Plenty" in the UK after being sold to SCA Svenska Cellulosa Aktiebolaget).
• Braun is a small-appliances manufacturer specializing in electric razors, coffeemakers, toasters, and blenders.
• Crest is a brand of toothpaste.
• Dawn is a brand of dishwashing detergent.
• Downy/Lenor is a brand of fabric softener.
• Duracell is a brand of batteries and flashlights.
• Fusion is a brand of men's wet shave razors and is the quickest P&G brand to have reached $1 billion in annual sales.
• Gain is a brand of laundry detergent and fabric softeners.
• Gillette is a safety razor manufacturer.
• Head & Shoulders is a brand of shampoo body wash, and deodorant.
• Old Spice is a brand of aftershave and shaving cream.
• Ivory is a soap.
• Nice 'n Easy is a hair coloring product.
• Olay is a brand of women's skin care products.
• Oral-B is a brand of toothbrush.
• Pampers is a brand of disposable diaper.
• Pantene is a brand of hair care products (conditioners/styling aids).
• Prilosec OTC is a brand of heartburn medicine co-marketed by AstraZeneca.
• Pringles is a brand of potato chips.
• Puffs is a brand of facial tissue.
• Secret is a brand of antiperspirant and deodorant.
• TAG is a deodorant and body spray.
• Tide is a brand of laundry detergent.
• Vicks is a brand name of over-the-counter medicines (Formula 44, Sinex, NyQuil/DayQuil)
• Wella is a brand name of hair care products (shampoo, conditioner, styling, and hair color).
• Whisper is a brand of pantyliners sold primarily in Asian markets.

Global Products A to Z

Most of these brands, including Bounty, Crest, Pringles, Puffs, and Tide, are global products available in several continents. Procter & Gamble products are available in North America, Latin America, Europe, the Middle East, Africa, and Asia.

How did P&G do in the latest quarter?

"The Procter & Gamble Company (NYSE:PG) reported net sales of $19.8 billion for the July - September quarter which exceeded the Company's guidance. Organic sales growth was up two percent versus a guidance range of flat to minus three percent on better than expected results across most business segments. Diluted net earnings per share increased three percent to $1.06, above the Company's guidance range of $0.95 to $1.00. The Company raised its outlook for the October - December quarter and fiscal 2010 organic sales growth citing modestly higher expectation for market growth. The Company also increased the low end of its fiscal year guidance range by $0.03 per share to reflect the higher top-line growth projection." - Courtesy PG.com Quarterly Press Release.

"Our September quarter results give us encouragement we are making the right choices to grow market share profitably," said President and Chief Executive Officer Bob McDonald. "We are investing in innovation, expanding our portfolio and improving consumer value to serve more consumers, in more parts of the world, more completely. We are driving simplification and improving execution while leveraging scale to create cost efficiencies that help fund these investments and accelerate growth."

What is sexy, new and exciting that P&G is innovating?

P&G recently introduced Cascade Complete All-in-1 ActionPacs.

Cascade Complete All-in-1 ActionPacs "give you the confidence of a job done right. It breaks down, dissolves, and rinses away tough food particles without the need to pre-wash."

Here is what one highly satisfied P&G customer had to say about All-in-1 ActionPacs:

OMG this is the most amazing product

"I have an older dishwasher that came with the apartment I live in. You had to completely wash the dishes before putting them in the dishwasher. I was basically using it to drain the dishes. I saw this on T.V. and went to walmart and got it. All I can say is it is almost magical the way it cleans. I tested it on several hard to wash dishes, dried oatmeal, dried rice krispy cereal and my stainless steel pots and everything came out clean, no stuck on food, no hard water residue. thank you! thank you! thank you! what a time saver. I am disabled and one of the hardest things to do is standing over the sink washing dishes."
By beadjeannie. Reviewer from Fresno, CA August 14, 2008

Marketing Machine

According to the Nielsen Company, in 2007 P&G spent more on U.S. advertising than any other company; the $2.62 billion spent by P&G is almost twice as much as that spent by General Motors, the next company on the Nielsen list.^[5] P&G was named 2008 Advertiser of the Year by Cannes International Advertising Festival.^[6]

Bottomline:

P&G is a great company with great leadership and employees, and highly satisfied customers. P&G will be around for the next 100 years. P&G will continue to grow high single digits even in this economy because of the breadth of its products, creativity and innovation, global market share, and delighted repeat customers who will not buy another brand. When P&G made increases in product prices to bolster revenue & profits - as high as 16 percent because of higher costs for plastic, energy, and paper in 2008 - consumers reacted and bought less of P&G products, and sales fell. P&G changed strategies in Q3 2009 to react to the price-conscious buyers & accommodate frugal shoppers: "Company leaders say they are cutting prices about 10 percent of their global product line, stepping up promotions such as coupons and other discounts, and making more “value” pitches to consumers." P&G also announced a new plan for its laundry business, slashing the price of Cheer detergent by 13 percent and promoting it as a bargain brand. In CEO McDonald's words: "the focus on innovation, expanding our portfolio and improving consumer value" are keys to P&G's continued growth.

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia ... Learn more
Download Now

Selected references:
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

Innovation Index Reports

Introducing The Innovation Index
Annual Report 2007 - The Innovation Index gains 66%
Measuring Business Innovation Success
Q1 2008 Report - Innovation Index ahead of S&P 500
Q2 2008 Report - Top Innovators Deliver
Top 50 Innovative Companies in the world
Annual Report - Chapter One - Total Innovation Activity
Annual Report - Chapter Two - The Top Innovator
Annual Report - Chapter Three - The Innovation Insights
Innovation and Stock Performance Correlation
Future earnings guidance, A leading indicator
Smart Investing In Tough Economic Times
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies

About the Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.The Innovation Index returned 66% in 2007 based on performance model, and would have returned 174% over the previous five years (2002-2006) based on historical model*. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S&P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.

Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NASDAQ: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)

The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.

Originally published in 2008; republished in with major revisions in 2009.

How Successful Is Your New Innovation? Measuring Business Innovation Success

I launched the Innovation Index in December 2006. The Innovation Index is a weighted stock price index of the Top 20 Innovators in North America.

On this Creativity And Innovation Driving Business blog, I provide the following:

1. Report, analyze and project the weighted stock performance of the Top 20 Innovators in North America every week, and compare their performance to S&P, NASDAQ and Dow Jones.

2. Compare and contrast best practices, initiatives, new products, successes, strategies, stories, leadership and insights on Creativity and Innovation at the Top 20 Innovators.

3. Showcase Disruptors challenging these Top Innovators, their disruptive innovation strategy, and their current and potential impact on the Top 20 Innovators' customer base and market share.

I also published a report on the correlation between the annual stock performance of the Top 20 Innovators of the Innovation Index versus total innovations produced, and provided insights from this relationship.

However, one question remains largely unanswered: What is the universal yardstick, the measurement for the success of a Business Innovation that companies and Innovation Gurus alike can possibly agree with? I have read books and magazines by leading authors and CEOs on innovation, have been fascinated by the innovations that innovative companies have created, have observed some of the successes these innovations have produced for their founders and shareholders, have witnessed a few of the customer "WOW" moments as they have used some of these innovations, and have measured the impact of these innovations on the company's stock performance.

So how does one measure business innovation success? Can it be measured by a qualitative measure that can somehow guage the emotional and psychological impact the innovation produces on the users (the "AaHa" moments), or a quantitative measure corresponding to the total population of end users using the new innovation (and even helping co-create it), or a financial measure in terms of net new revenue generated for the company that can be attributed to the new innovation? An innovation is only successful if the product or service is able to find and attract new customers who adopt and adapt to it, live by it, talk about it, and refer others to it; ultimately, the innovation must result in substantial new business for the company.

Selected Reference:

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia...Learn more
Download Now

What are some examples of successful innovations? iMac, iPod/iTunes by Apple, Music by Amazon.com, PayPal by eBay, All-in-One Printers by HP, Business laptops by Dell, Penryn microprocessors by Intel, Medical Imaging and Jet Engines by GE, Mr. Clean by P&G, Starbucks Coffee Card by Starbucks, High definition television business at Costco and Best Buy, Coffee and Iced Coffee by McDonald's, Apparel business by Nike, Xbox and Xbox 360 by Microsoft, Blackberry Curve by Research In Motion, AdWords by Google, TelePresence by Cisco, Microprocessors powering Nintendo Wii and other game consoles by IBM, Hybrid cars by Toyota, Mini car by BMW, Saturn by GM, and many more.

We have many examples of hyped-up innovations that have failed after launch - Motorola's satellite phone foray aka Project Iridium (although Motorola came back with a bang with Moto Razr cell phone), General Motors' Electric concept car (which is being reborn for a new launch), and Microsoft's MSN Search (which has been reborn into Live Search). One thing is certain: Top Innovators do not stop innovating on account of failed innovations. Rather, failure is part and parcel of their creativity and innovation initiatives, and many a times, failure is a good thing. True Innovators find a way to learn from their failed experiments, and come out stronger. GE CEO Jeff Immelt agrees with P&G CEO A.G. Lafley on the core principles that drive growth and innovation. He states: "It's important to make growth a process...Just like A.G (Lafley), I want a pipeline of innovation. Some projects will fail. But the goal for a company like ours or P&G is using size as an advantage. Most people just assume that big companies are slow and lethargic, and only a small company can grow. But if you get good processes, you can make size an advantage."

Before I present my yardstick for measuring innovation success, I would like to establish a baseline. For instance, I am going to assume that an Innovator must have revenue of at least $500 million. The Innovator must be in existence for at least five years, and the $500 million revenue it generates must be based on products or services that the innovator has created itself. In addition, the Innovator should be showing consistent annual growth in total revenue and net earnings for the previous three years, and deliver at least 15% of total revenue from products introduced within the past five years.

Business Innovation Success Measurement

An Innovation that produces at least 5% of company's total revenue (up to equal margins) within three years after commercial launch, and grows to at least 15% of company's total revenue (with equal or better margins) within eight years of commercial launch is 100% successful. If an Innovation achieves the target revenues within a shorter time, or over-achieves the target revenues within the given time, Innovation success rate is considered greater than 100%. On the other hand, if an Innovation misses the targets of either time or revenue, it would be considered less than 100% successful.

Company A	At least $500 million annual revenue
Innovation ABC Launch
Time	Within 3 years from Launch
Innovation Revenue	At least 5% of company annual revenue
Innovation Margins	Close to equal margins
FIRST MILESTONE REACHED	Innovation ABC 50% Successful
CONTINUE / EXPAND	Innovation ABC Funding
Time	Within 8 years from Launch
Innovation Revenue	At least 15% of company annual revenue
Innovation Margins	Equal or better margins
SECOND MILESTONE REACHED	Innovation ABC 100% Successful
FUND NEW INITIATIVES

Here are a few hypothetical examples:

	Year One	Year Two	Year Three	Year Four	Year Five	Year Six	Year Seven	Year Eight
Company A	$550,000	$605,000	$665,500	$732,050	$805,255	$885,781	$974,359	$1,071,794
Innovation ABC	$8,000	$16,000	$33,200	$53,000	$75,000	$100,000	$128,000	$168,000
Company+Innovation	$558,000	$621,000	$698,700	$785,050	$880,255	$985,781	$1,102,359	$1,239,794
Innovation ABC Growth		100%	108%	60%	42%	33%	28%	31%
Company Growth	10%	10%	10%	10%	10%	10%	10%	10%
Total Growth	10%	11%	13%	12%	12%	12%	12%	12%

All revenues in thousands

Company A has $500 million in annual revenue, and is growing at an annual growth of 10%. Company A launches Innovation ABC. Innovation ABC must produce at least 5% of $665 million (Company A's revenue compounded at 10% annual growth in three years) within three years or new sales of $33.2 million, and at least 15% of $1.072 billion within eight years or at least $160 million in new sales to be 100% successful. For instance, Innovation ABC can produce $8 million in first year, $16 million in year two, $33.2 million in third year, $53 million in year four, $75 million in year five, $100 million in year six, $128 million in year seven, and $168 million in year eight. Average Compounded Annual Growth Rate from Innovation ABC is just over 40%. The new innovation ABC has effectively increased the company's annual growth rate to about 12%, or a net increase of about 2%.

Company B has $5 billion in annual revenue, and is growing at an annual rate of 10%. Company B launches Innovation DEF. Innovation DEF must produce at least 5% of $6.65 billion (Company B's revenue compounded at 10% annual growth in three years) within three years or new sales of $332 million, and at least 15% of $10.72 billion within eight years or $1.61 billion in new sales to be 100% successful.

Company C has $20 billion in annual revenue, and is growing at an annual rate of 15%. Company C launches Innovation GHI. Innovation GHI must produce at least 5% of $30.41 billion (Company C's revenue compounded at 15% annual growth in three years) within three years or new sales of $1.52 billion, and at least 15% of $61.18 billion within eight years or $9.17 billion in new sales to be 100% successful.

Company D has $50 billion in annual revenue, and is growing at an annual rate of 5%. Company D launches Innovation JKL. Innovation JKL must produce at least 5% of $57.9 billion (Company D's revenue compounded at 5% annual growth in three years) within three years or new sales of $2.89 billion, and at least 10% of $73.8 billion within eight years or $7.38 billion in new sales to be 100% successful.

Company E has $100 billion in annual revenue, and is growing at an annual rate of 6%. Company E launches Innovation MNO. Innovation MNO must produce at least 5% of $119.10 billion (Company E's revenue compounded at 6% annual growth in three years) within three years or new sales of $5.96 billion, and at least 15% of $159.38 billion within eight years or $23.9 billion in new sales to be 100% successful. Thus, company E's total revenue at the end of year eight would be $159.38 billion + $23.9 billion = $183.28 billion. The new innovation MNO has effectively increased the company's annual growth rate to 7.9%, an increase of about 1.9%.

Here is a real example of successful innovation:

Apple introduced Apple iPod in 2001. Apple iPod business generated total revenue of $537 million in Q4, 2004 (three years from launch), and was already 22.8% of Apple's total revenue of $2.35 billion in Q4, 2004 (easily eclipsing the 5% mark - although electronics and computer segments do show higher average percent revenue from new products - check Figure 1 below). Apple iPod business generated total revenue of $1.82 billion in Q2, 2008, (within seven years from launch), about 24.2 % of Apple's total revenue of $7.5 billion in Q2, 2008 (well ahead of the 15% threshold). Apple iPod business has consistent or better margins than Apple's hardware businesses. As a matter of fact, iPod saved Apple and made Apple successful again. iPod delivered 5.5% of total Apple revenue in 2003, within the first three years of launch, and delivered 34.6% of total Apple revenue in 2007, within the first seven years of launch.

What about the newly launched iPhone from Apple? Is iPhone equally successful as iPod, or better? iPhone is off to a fast start. In the latest quarter, iPhone innovation produced net revenue of $419 million, or 5.61% of Apple’s total revenue of $7.4 billion. This is staggering, since iPhone was only introduced one year ago. It took iPod more than two years to achieve the 5% mark; iPhone achieved this mark in just one year. If iPhone continues the momentum, it could achieve the 15% mark before end of 2009.

Selected Reference:

Download my Creativity and Innovation eBook. 212-page collection of over 55 best practices, case studies, and insights on the current state of Creativity and Innovation in Business at Top Innovators including Apple, Google, Netflix, 3M, Frito Lay, Johnson & Johnson, Proctor & Gamble, Toyota, GE, BMW, Deloitte, Southwest, Nike, IBM, Dell and more. "Your report from the eBook and definitive guide was the primary reference that we used." Used by over 500 leading organizations including HP, Pepsi, EDS, J&J, Nokia...Learn more
Download Now

Some Questions and Answers:

Question 1: Why I chose 5% of company's total revenue as the initial threshold for innovation success?

Most CEOs and CFOs of large innovative companies use 5% of total revenue as a benchmark to test the success of new products or services. Check Figure 1. and Figure 2. under references. In a particular industry, the initial milestone can be less than 5%. The key is to remain consistent.

Question 2: Why I chose three years from commercial launch as the initial milestone/threshold for innovation success?

Most marketing plans for new products or services involve a three-year lifecycle for measuring the initial success, with various milestones along the way. A particular industry may measure this milestone within two years or even four years.

Question 3: Why I chose 15% of company's total revenue as the final threshold for innovation success?

Average percent of revenue from new products or services across all industries in one year is 15.72%. Check Figure 1. and 2. below. Average of Median percent of revenue from new products or services across all industries in one year is 11.3%. Thus, for companies to be reasonably successful, they need to deliver 15% of total revenue from new products or services. In a particular industry, the final milestone can be higher – for example, in Computers industry, 34.5% of total revenue is derived from new products.

Question 4: Why I chose eight years from commercial launch as the final threshold for innovation success?

Most new companies, products or services that make it beyond the first year, and are successful beyond the third year typically reach their highest market penetration in years six through ten. Eight years is mid-point. Many companies may achieve this success within eight years.

Question 5: Why I measure the new revenue from innovation success as a percentage of company's compounded annual revenue?

This provides a more realistic measure. Innovative companies are always growing, and hence it makes sense to equate an Innovation's new revenue to the current revenue of the company.

Question 6: Why should an Innovation have equal or better margins?

Sometimes an innovation can produce high revenue, but can end up costing the company more money to produce. In this scenario, company ends up losing money, or does not show a growth in net earnings owing to the high costs of producing the innovation. While the Innovation is growing to the initial 5% of company's total revenue, the company can fine-tune the margins. However, as the contribution of the Innovation increases beyond 5%, it is imperative that the margins are equal or better than company's current operating margins. An Innovation needs to be both profit and revenue producing to be truly successful.

Question 7: We do not measure our innovation success by net revenue contribution, rather by customer adoption and loyalty, or another quality measure.

A similar metric may be established to gauge the initial milestone of success – say 5% increase in customer loyalty, or 5% increase in product quality within three years from launch of the new initiative, and 15% increase within eight years. The objective is to stay consistent.

Bottomline:

An Innovation that produces at least 5% of company's total revenue (up to equal margins) within three years after commercial launch, and grows to at least 15% of company's total revenue (with equal or better margins) within eight years of commercial launch is 100% successful.

References:

Apple press releases / SEC filings / Wikipedia

Figure 1.--Average percent of annual revenue from new products in one year by selected industries.

	Number of companies reporting	% of Annual Revenue
Chemicals and Applied Material	50-55	4.5%
Aerospace and Defense	55-60	8.3%
Medical Equipment and Devices	85-90	9.8%
Semi-conductors	100-105	13.7%
Telecom Services	20-25	16.0%
Electronic Equipment	75-80	19.2%
Telecom Equipment	125-130	19.8%
Computers	55-60	34.5%
All Industries Average		15.72%

Note: Table made from bar graph

Figure 2.--Median percent of revenue from new products in one year by selected industries.

	Number of companies reporting	% of Annual Revenue
Chemicals and Applied Material	50-55	3.2%
Aerospace and Defense	55-60	3.3%
Medical Equipment and Devices	85-90	7.4%
Semi-conductors	100-105	10.1%
Telecom Services	20-25	10.3%
Electronic Equipment	75-80	12.9%
Telecom Equipment	125-130	13.7%
Computers	55-60	29.5%
All Industries Median Average		11.3%

Note: Table made from bar graph.

Source for the above two tables: Measuring innovation: beyond revenue from new products: a synthesis of two common measures of innovation yields insight into both the pattern of new product churn and the pattern of corporate renewal. Research-Technology Management Nov-Dec, 2006

The Innovation Index Reports:
Introducing The Innovation Index - Learn about the Innovation Index
Q1 2008 Report - Innovation Index ahead of S&P 500 - Q1, 2008 Report
The Innovation Index closes 2007 at 66% - 2007 Annual Report on the Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Innovative Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
Future earnings guidance, A leading indicator - Earnings Guidance and Stock Price
Smart Investing In Tough Economic Times - Guide to Prudent, Value Investing
To Sell Or Not To Sell - Long-Term Investing in Turbulent Markets

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index returned 66% in 2007 based on performance model, and would have returned 174% over the previous five years (2002-2006) based on historical model*. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.*

Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NASDAQ: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)

The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.

*Past Performance Does Not Guarantee Future Results