McKinsey have come up with a new way of gauging innovation, which they say has advantages over the "serious shortcomings" of other methods, which focus on indicators such as R&D spending or patent applications, and often give a "narrow view of innovation".
Crucially, McKinsey argues that such methods mostly "fail to connect innovation to company performance".
The consulting group's method focuses on "publicly available data" and compares revenue growth within a company or a part of business to revenue growth in the overall market, attributing a better-than-market performance to the company's "ability to innovate".
Thus, McKinsey attributes an "innovation performance score (IPS)" to each firm, expressed as a percentage, "which shows the compound annual growth rate for a specified period that can be attributed to innovation".
The research undertaken so far shows "considerable differences in scores" between industries, reports McKinsey. For example, TV and telephone makers "generally score higher than beer and drug companies".
Another finding in McKinsey's work was that "business model innovation tended to generate bigger gains than product or process innovation".
A strong IPS score "appears to be a reliable indicator of a company’s stock market performance".
The consulting firm outlines four lessons to be learned from the IPS:
- Strong innovators do consistently well;
- innovators continue to outperform their peers even during tough times;
- a significant degree of business model innovation seems to be necessary for superior innovation impact, and;
- there may be an optimum level of innovation.
McKinsey found that "understanding the details of innovation performance can help companies determine where they stand in innovation impact vis-à-vis their competition by comparing their respective innovation scores".
Moreover, "IPS can be applied internally to compare innovation performance across business units," McKinsey says.
Understanding how innovation works "will require additional study," McKinsey concludes, but the group believes that with "better metrics", companies will be able to calibrate strategies, make better investments and "ultimately improve their competitiveness".
