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
The Innovation Index had a remarkable showing in 2009, gaining 48.65%, and beating S&P 500, Dow Jones and NASDAQ. 17 of the top 20 innovators were in the green. 3 of the top 20 innovators, including Amazon.com (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG) had over 100% gains. 16 of the top 20 innovators had double-digit gains. eBay (NASDAQ: EBAY) and Research In Motion (NASDAQ: RIMM) gained over 65% each. America Movil (NYSE: AMX), IBM (NYSE: IBM) and Microsoft (NASDAQ: MSFT) gained over 50% each. Only 3 innovators were in the red.
