Closing the Innovation Gap

Closing the Innovation Gap

Eileen Mullin

Expecting revenues to increase year after year through business-as-usual practices may be standard for many companies. But becoming an industry leader requires significant revenue growth beyond what can be attributed to inflation, the positive aftermath of a merger or acquisition, or Enron-esque accounting practices. The essential ingredient, according to some, is innovation.

More than three-quarters of CEOs of fast-growing companies cited innovation as their strongest competitive advantage, according to a recent PricewaterhouseCoopers survey. These respondents anticipated an average of 16.2% revenue growth in the next year, versus their peers’ estimate of 12.5%—giving the innovation leaders a 30% edge in faster revenue growth.

So how do companies brainstorm to find out what they need to do to create stellar financial performance? Technology departments may hold the key, says Mark Turrell, Imaginatik’s CEO. Building on the old concept of the employee suggestion box, enterprises are earmarking part of their corporate intranets for idea-sharing. In this way, companies are creating knowledge management systems that can shepherd cost-cutting methods or novel production approaches from the furthest satellite offices or manufacturing floor direct to company headquarters.

For example, pharmaceuticals firm Bristol-Myers Squibb, like its competitors, depends greatly on innovative research and problem-solving to develop new drugs. But lucrative breakthroughs are elusive: In 2000, the Wall Street Journal reports, U.S. drug makers as a whole spent more than $25 billion on research and development, but filed fewer than 150 applications for new drugs. This is a downward trend from 1983, when U.S. drug manufacturers spent less than $4 billion but filed more than 250 such applications. To combat this, Bristol-Myers Squibb invested in Imaginatik’s Idea Central application, which it rolled out to 30,000 employees. After six months, employees had submitted more than 5,000 ideas, some of which were translated into the marketplace within months. Bristol-Myers Squibb says the ideas it has received for generating revenue, improving marketing, cutting costs and refining processes will translate into a multi-million-dollar increase in revenue by the end of the software’s first full year of use.

“There’s a lot of pressure put on companies to create real organic growth,” says Turrell. Greater scrutiny of accounting guidelines have made companies more accountable than ever for demonstrating where their profits are coming from. Accordingly, he notes, one of the best arguments for persuading management to chart a new path “is to show the value of good innovation.”

For example, agribusiness conglomerate Cargill estimated its innovation gap at 10% of its entire revenue—or $5.5 billion. in response, it established an internal office of innovation.

Imaginatik uses a four-part calculation to assess a company’s innovation gap. The factors include:

Revenue growth. This depicts what percentage of revenue growth is expected to come from new sources (such as a new product line).

Revenue protection. This shows what percent age of current revenue is at risk if the company doesn’t appropriately respond to new opportunities. Customer relationship management software is often implemented as an innovative technological approach to protecting revenues.

Cost containment. Most companies set goals for containing costs, such as determining how much its to reduce expenses in a given year. This figure addresses what percentage can only be addressed via new, innovative methods. The airline industry especially, notes Turrell, suffers from a very high innovation gap attributed to difficulties with cost containment.

Disruptive change. While difficult to calculate, this figure compels companies to calculate the likelihood that an unexpected event may occur and what impact that major change will have on the bottom line. Although disaster scenarios are easiest to imagine, it’s possible for a disruptive change to be positive.

Recognizing the role that innovation plays can help companies establish their strategic options, observes Turrell. If a company determines it cannot overcome its innovation gap over time, it will have a better sense of how many more years it has left to run a profitable business before closing shop or selling.

“Very often companies intuitively know that innovation is important,” says Turrell. “But without knowing how important, they struggle to allocate resources.”

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.