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Special Report
The world's most innovative companies
Their creativity goes beyond products to rewiring themselves. BusinessWeek and the Boston Consulting Group rank the best.
By BusinessWeek
It was a fitting way to wrap up the first day of IBM innovation-themed leadership forum, held in Rome in early April. Guests were treated to small group tours of the Vatican Museum, including Michelangelo's frescoes in the Sistine Chapel. They sipped cocktails on a patio in the back of St. Peter's, the vast dome of the basilica outlined by the light of the moon. They dined in a marble-statue-filled hall inside the Vatican. What better place than Italy to hold a global confab on innovation, the topic di giorno among corporate leaders? It was, after all, the birthplace of the Renaissance, another period of great innovation and change.
The next day, at the Auditorium Parco della Musica, 500-odd corporate executives, government leaders, and academics listened as a diverse group of innovative leaders took the stage. Sunil B. Mittal, chief executive officer of Indian telecom company Bharti Tele-Ventures Ltd., described his radical business model, which outsources everything but marketing and customer management, charges 2 cents a minute for calls, and is adding a million customers a month. Yang Mingsheng, CEO of Agricultural Bank of China, the country's second-biggest commercial bank, spoke of building a banking powerhouse from a modest business making micro loans to peasant farmers.
Their stories echoed a comment IBM (IBM, news, msgs) CEO Samuel J. Palmisano had made the day before: "The way you will thrive in this environment is by innovating -- innovating in technologies, innovating in strategies, innovating in business models."
Palmisano, to be sure, was making a subtle pitch for IBM and its ability to help the assembled leaders do well in an increasingly challenging business environment. But he also summed up the broad focus of innovation in the 21st century.
Today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs. Most important, as the Internet and globalization widen the pool of new ideas, it's about selecting and executing the right ideas and bringing them to market in record time.
In the 1990s, innovation was about technology and control of quality and cost. Today, it's about taking corporate organizations built for efficiency and rewiring them for creativity and growth. "There are a lot of different things that fall under the rubric of innovation," says Vijay Govindarajan, a professor at Dartmouth College's Tuck School of Business and author of Ten Rules for Strategic Innovators: From Idea to Execution. "Innovation does not have to have anything to do with technology."
The quick and the blocked
To discover which companies innovate best -- and why -- BusinessWeek joined with The Boston Consulting Group to produce our second annual ranking of the 25 most innovative companies. More than 1,000 senior managers responded to the global survey, making it our deepest management survey to date on this critical issue.
The new ranking has companies evoking all types of innovation. There are technology innovators, such as BlackBerry maker and newcomer Research In Motion (RIMM, news, msgs) which makes its debut on our list at No. 24. There are business model innovators, such as No. 11 Virgin Group Ltd., which applies its hip lifestyle brand to ho-hum operations such as airlines, financial services, and even health insurance. Process innovators are there, too: Rounding out the ranking is Southwest Airlines (LUV, news, msgs) at No. 25, a whiz at wielding operational improvements to outfly its competitors.
At the top of the list are the masters of many genres of innovation. Take Apple Computer (AAPL, news, msgs), once again the creative king. To launch the iPod, says innovation consultant Larry Keeley of Doblin Inc., Apple used no fewer than seven types of innovation. They included networking (a novel agreement among music companies to sell their songs online), business model (songs sold for a buck each online), and branding (how cool are those white ear buds and wires?). Consumers love the ease and feel of the iPod, but it is the simplicity of the iTunes software platform that turned a great MP3 player into a revenue-gushing phenomenon.
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Toyota Motor (TM, news, msgs), which leapt 10 spots this year to No. 4, is becoming a master of many as well. The Japanese auto giant is best known for an obsessive focus on innovating its manufacturing processes. But thanks to the hot-selling Prius, Toyota is earning even more respect as a product innovator. It is also collaborating more closely with suppliers to generate innovation. Last year, Toyota launched its Value Innovation strategy. Rather than work with suppliers just to cut costs of individual parts, it is delving further back in the design process to find savings spanning entire vehicle systems.
The BusinessWeek-BCG survey is more than just a Who's Who list of innovators. It also focuses on the major obstacles to innovation that executives face today. While 72% of the senior executives in the survey named innovation as one of their top three priorities, almost half said they were dissatisfied with the returns on their investments in that area.
The No. 1 obstacle, according to our survey takers, is slow development times. Fast-changing consumer demands, global outsourcing, and open-source software make speed to market paramount today. Yet companies often can't organize themselves to move faster, says George Stalk Jr., a senior vice-president with BCG who has studied time-based competition for 25 years. Fast cycle times require taking bets even when huge payoffs aren't a certainty. "Some organizations are nearly immobilized by the notion that [they] can't do anything unless it moves the needle," says Stalk. In addition, he says, speed requires coordination from the hub: "Fast innovators organize the corporate center to drive growth. They don't wait for [it] to come up through the business units."
Indeed, a lack of coordination is the second-biggest barrier to innovation, according to the survey's findings. But collaboration requires much more than paying lip service to breaking down silos. The best innovators reroute reporting lines and create physical spaces for collaboration. They team up people from across the org chart and link rewards to innovation. Innovative companies build innovation cultures. "You have to be willing to get down into the plumbing of the organization and align the nervous system of the company," says James P. Andrew, who heads the innovation practice at BCG.
Procter & Gamble (PG, news, msgs) (No. 7) has done just that in transforming its traditional in-house research and development process into an open-source innovation strategy it calls "connect and develop." The new method? Embrace the collective brains of the world. Make it a goal that 50% of the company's new products come from outside P&G's labs. Tap networks of inventors, scientists, and suppliers for new products that can be developed in-house.
The radically different approach couldn't be shoehorned into managers' existing responsibilities. Rather, P&G had to tear apart and restitch much of its research organization. It created new job classifications, such as 70 worldwide "technology entrepreneurs," or TEs, who act as scouts, looking for the latest breakthroughs from places such as university labs. TEs also develop "technology game boards" that map out where technology opportunities lie and help P&Gers get inside the minds of its competitors.
To spearhead the connect-and-develop efforts, Larry Huston took on the newly created role of vice-president for innovation and knowledge. Each business unit, from household care to family health, added a manager responsible for driving cultural change around the new model. The managers communicate directly with Huston, who also oversees the technology entrepreneurs and managers running the external innovation networks. "You want to have a coherent strategy across the organization," says Huston. "The ideas tend to be bigger when you have someone sitting at the center looking at the company's growth goals."
Asking the right questions
Coordinating innovation from the center is taken literally at BMW Group (BMW, news, msgs), No. 16 on the list. Each time BMW begins developing a car, the project team's members -- some 200 to 300 staffers from engineering, design, production, marketing, purchasing, and finance -- are relocated from their scattered locations to the auto maker's Research and Innovation Center, called FIZ, for up to three years. Such proximity helps speed up communications (and therefore car development) and encourages face-to-face meetings that prevent late-stage conflicts between, say, marketing and engineering. In 2004 these teams began meeting in the center's new Project House, a unique structure that lets them work a short walk from the company's 8,000 researchers and developers and alongside life-size clay prototypes of the car in development.
For many companies, cross-functional collaborations last weeks or months, not years. Southwest recently gathered people from its in-flight, ground, maintenance, and dispatch operations. For six months they met for 10 hours a week, brainstorming ideas to address a broad issue: What are the highest-impact changes we can make to our aircraft operations?
The group presented 109 ideas to senior management, three of which involve sweeping operational changes. One solution about to be introduced will reduce the number of aircraft "swaps" -- disruptive events that occur when one aircraft has to be substituted for another during mechanical problems. Chief Information Officer Tom Nealon says the diversity of the people on the team was crucial, mentioning one director from the airline's schedule planning division in particular. "He had almost a naive perspective," says Nealon. "His questions were so fundamental they challenged the premises the maintenance and dispatch guys had worked on for the last 30 years."
Managers are scrambling to come up with ways to measure and raise the productivity of their innovation efforts. Yet the BusinessWeek-BCG survey shows widespread differences over which metrics -- such as the ratio of products that succeed, or the ROI of innovation projects -- should be used and how best to use them. Some two-thirds of the managers in the survey say metrics have the most impact in the selection of the right ideas to fund and develop. About half say they use metrics best in assessing the health of their company's innovation portfolio. But as many as 47% said measurements on the impact of innovation after products or services have been launched are used only sporadically.
Actually, most managers in the survey aren't monitoring many innovation metrics at all; 63% follow five gauges or fewer. "Two or three metrics just don't give you the visibility to get down to root causes," says BCG's Andrew. Then there are companies that track far too many. Andrew says one of the top innovators on our list -- he's mum as to which one -- collects 85 different innovation metrics in one of its businesses. "That means they manage none of them," he says. "They default to a couple, but they spend an immense amount of time and effort collecting those 85."
The sweet spot is somewhere between 8 and 12 metrics, says Andrew. That's about the number that Samsung Electronics Co. uses, says Chu Woosik, a senior vice-president at the South Korean company. Chu says the most important metrics are price premiums and how quickly they can bring to market phones that delight customers. Samsung also watches the allocation of investments across projects and its new-product success ratio. That, Chu says, has nearly doubled in the last five years. "You want to see it from every angle," he says. "A lot of companies fall into the trap that they thought things were really improving, but in the end, it didn't work out that way. We don't want to make that mistake."
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