The Innovation Premium

18 Oct 2011 Sandeep Mehta

INSEAD Knowledge had an intriguing article that I have been meaning to write about.  The Innovation Premium meanders along multiple themes (some of them untenable) but in the end has a couple of interesting observations.  The article discusses the book The Innovator’s DNA:

“Innovation makes millionaires and undermines monopolies. It raises the profitability of companies and puts a premium on the shares of the most successful. But how can companies foster it? New research sheds light on the innovation process and how firms can tap into it to raise their performance and their share price.”

To that end, the article defines innovative companies purely based on share prices:

Common to all companies on the list is the fact that their share prices are 25 percent or more above what would be justified by cash flow alone. The leader is cloud computing company, with its AppExchange that offers more than 1,000 applications for businesses, and which recently launched Chatter draws on features of Facebook and Twitter to provide social software for enterprise collaboration. Market expectations for further innovations have given it a premium based on 2010 results of no less than 75 percent.

We have discussed in the past that Wall Street is NOT a consistent or dependable evaluator of innovation. In fact, Wall Street rewards predictability more than disruptive innovations.  The share price measure would move companies like Netflix from innovative to not in the matter of weeks! RIM and Blackberry has moved into the non-innovative group since the article was written a few weeks ago…

The lack of universally acceptable definition of innovation (such as the Oslo Framework) notwithstanding, the article still had some interesting points.  A key point is that the leaders in innovative companies ask a lot of questions, challenge the status quo and do so based on personal involvement / observation (as opposed to through subordinate presentations):

They, too, are always asking questions and looking out for the unexpected: “Why not this? Why couldn’t we do that? What’s going on here? How could we do this better?” When someone “behaves that way, acts differently, asks lots of questions, observes like an anthropologist, experiments constantly, networks for new ideas,” Gregersen observes, “they’re likely to get incredibly insightful ideas about new businesses, new products, new services, breakthrough processes: things that will make a difference for any company or country.”

The article also suggests (as we have discussed many times) that innovation starts from the top and that the leaders actually have to start the innovation process – not wait for it to bubble up from the bottom.  The article also disruptive innovation is hard to manage and integrate into the product line. Innovative leaders have to actually nurture innovation.  Since the article mentions Steve Jobs, and we can certainly learn from him as well.

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