SOURCE: The Boston Consulting Group

August 05, 2008 00:01 ET

BCG Study Finds Frustration With Innovation Growing

Executives View Innovation as Critical, but Many Feel Results Are Elusive; Many Firms Appear to Be Pulling Back on Innovation Spending as a Result

BOSTON, MA--(Marketwire - August 5, 2008) - The Boston Consulting Group's (BCG's) fifth annual global survey and report on innovation, "Innovation 2008: Is the Tide Turning?" illuminates deepening executive frustration with innovation returns. It also reveals a worrying trend: an ongoing decline in the percentage of companies that plan to raise their innovation spending.

Of the nearly 3,000 executives BCG surveyed worldwide, only 43 percent said they were satisfied with their return on innovation spending, compared with 46 percent in 2007 and 52 percent in 2006. Simultaneously, the percentage of executives who said their company will increase its investment in innovation in the year ahead has fallen in each of the last three years -- to 63 percent in 2008, from 67 percent in 2007 and 72 percent in 2006.

"Companies remain staunch believers in the importance of innovation," said BCG Senior Partner James P. Andrew, lead author of the report. "But many are growing increasingly frustrated with their lack of payback on innovation spending, and some firms are apparently starting to think twice. This could have major implications for corporate competitiveness."

Andrew leads BCG's Innovation practice and co-authored last year's best-seller, "Payback: Reaping the Rewards of Innovation" (Harvard Business School Press), with Harold L. Sirkin, also a BCG senior partner and one of the report's co-authors. "For most firms, the problem of disappointing returns is fixable. But it demands a sustained and concerted effort as well as an understanding of what to focus on, which many companies seem to lack. It's something they desperately need to develop," said Sirkin.

The report, which was based on a global survey of executives that BCG, in partnership with BusinessWeek, conducted earlier this year, addresses a number of the most important topics associated with effective -- that is, profitable -- innovation, including the establishment of meaningful objectives and the development of "best practice" tactics and capabilities. (For a detailed look at one of the topics covered -- metrics and measurement -- see BCG's companion report, "Measuring Innovation 2008: Squandered Opportunities.") Key findings of "Innovation 2008: Is the Tide Turning?" include the following.

Weaknesses

The top four factors driving down the return on innovation spending are lengthy development times and a risk-averse corporate culture (both cited by 36 percent of respondents), along with difficulty selecting the right ideas to commercialize and a lack of internal coordination (both cited by 33 percent of respondents).

Strengths

Executives believe their companies' greatest innovation strengths lie in the areas of developing a deep understanding of customers (68 percent of respondents) and ensuring executive-level sponsorship of projects (67 percent).

Objectives

Companies are not looking to conquer new worlds with their innovation efforts but rather to expand their share of existing customers' spending. Fully 89 percent of executives said they consider innovation that leads to new products and services for existing customers to be the type of innovation most critical to their company's future success.

Spending Plans

Entertainment and media companies have the most aggressive spending plans. Fully 69 percent of respondents from that industry said their company would increase spending in 2008, followed by travel, tourism, and hospitality companies (68 percent), industrial goods and manufacturing companies (65 percent), and consumer products companies (65 percent).

Measurement

The most popular metrics for gauging the success of innovation efforts are customer satisfaction (54 percent of companies said they use it) and the percentage of sales from new offerings (47 percent).

Leveraging of Rapidly Developing Economies

Companies continue to take a measured approach to conducting innovation in rapidly developing economies. Thirty-seven percent of respondents said their company planned to increase its investment in such countries in 2008, virtually the same percentage as in 2007. India and China remain the primary targets of RDE investment, and product development remains the main objective.

Innovation Success and Stock-Market Performance

Innovative companies generate superior total returns for shareholders. Globally, innovators outperformed their peers by 530 basis points on an annualized basis over the last three years; over the last ten years, they outperformed them by 440 basis points. The pattern of substantial outperformance for innovators held when viewed along regional lines. (In recognition of this fact, Standard & Poor's created the S&P/BusinessWeek Global Innovation Index, which tracks the investment results of 25 of the most innovative companies in the world; the index is based on the BCG/BusinessWeek survey of senior executives.)

"With competitive pressures rising globally, now is precisely the wrong time for companies to be shying away from spending on innovation, if that is indeed what we're seeing," concluded Andrew. "Instead, companies should be redoubling their efforts. Innovation is one of the few -- perhaps the only -- means of generating sustainable competitive advantage. Companies need to recognize that and structure their priorities and activities accordingly."

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.