Perspective

Barry Jaruzelski John Loehr Richard Holman

The 2012 Global Innovation 1000 Key Findings

INTRODUCTION AND KEY FINDINGS

The 2012 Global Innovation 1000: Introduction and Key Findings Every year since 2005, Booz & Company has conducted the Global Innovation 1000 study, which investigates the relationship between how much companies spend on R&D and their overall financial performance and long-term financial successand every year, the study reinforces the conclusion that there is no correlation between the two. Instead, it is how companies leverage their R&D investments in conjunction with other resources and internal structuressuch as personnel, capabilities, and decision-making processes that determines their ability to execute their innovation agendas. In our eighth annual study of the worlds 1,000 largest corporate R&D spenders, we focus on the fuzzy front end of the innovation processthe tools, mechanisms, and networks companies use to generate ideas and effectively convert them to commercialized products. We surveyed nearly 700 companies and interviewed 12 senior innovation executives and chief technology officers at leading companies to gain insights into the early stages of innovation, as well as to understand which companies they viewed as the most innovative in the world.

This year, weve identified five key themes from the Global Innovation 1000 study: The Worlds Top 10 Most Innovative Companies Are ChangingSamsung continues its steady rise as Facebook falls. R&D Spending is in RecoveryAfter the recession, R&D is back on a solid growth trend. Spending InnovationMore dollars spent doesnt guarantee innovation success. Weve Got No IdeaNearly half of the organizations surveyed believe they are only marginally effective at both idea generation and conversion. Tried and True RulesThe most successful innovators employ traditional methods for innovation success.

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The Worlds Top 10 Most Innovative Companies Are Changing

Guidelines: CHANGE IN THE TOP 10 MOST INNOVATIVE COMPANIES 20102012 2010 1st 2
nd

11.0 million alkdflka 32.8% 30.1%

= = = =

2011 Apple Google 3M GE Microsoft IBM Samsung P&G Toyota Facebook

2012 Apple Google 3M Samsung GE Microsoft Toyota P&G Tie IBM Amazon

Apple Google 3M GE Toyota Microsoft P&G IBM Samsung Intel

3rd 4th 5th 6th 7th 8th 9th 10th

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This year Amazon joined the Top 10 Most Innovative Companies ranking (#10), bumping Facebook from the list. For the second straight year, Samsung rose in rank (now ranked #4). Apple, Google, and 3M kept their 1st, 2nd, and 3rd positions, respectively.

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Barry Jaruzelski, senior partner at Booz & Company: Facebooks drop from the Top 10 Most Innovative Companies list may suggest that social media companies have lost some of their initial luster. In contrast, Amazons first-time appearance on the list suggests that both the R&D community and consumers recognize companies as providing superior value when they offer products and services in creative new ways that meet customer needs through technical innovation.

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R&D Spending Is In Recovery

Innovation 1000 R&D Spend

R&D spend grew 9.6% in 2011, continuing 2010's strong growth after the 2009 decline
Guidelines: THE GLOBAL INNOVATION 1000 R&D SPEND 20012011; $BILLION $603 11-year CAGR = 6% $417 $450 $521 $550 $503 11.0 million alkdflka 32.8% 30.1% = = = =

$495

$353

$355

$369

$391

3-year CAGR =9.5%

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3-year CAGR = 3.5%

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2001 Annual Growth 0.6%

2002

2003 3.7% 6.2%

2004 6.5%

2005 7.9%

2006 10.0%

2007 5.4%

2008

2009 -3.5% 9.3%

2010

2011 9.6%

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Sources: Bloomberg data; Booz & Company Innovation 1000 articles in strategy + business; Booz & Company analysis

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1st 2nd 3rd 4th 5th 6th 7th 8th 8th 10th

In 2011, corporate spending among the Global Innovation 1000 reached an all-time 2010 2011 2012 high of $603 billion, an increase of 9.6 percent from the previous year. R&D spend Apple Apple increased in 2011 across most Apple industry sectors and geographies. This is the second strong increase of R&D spending in a row (there was a 9.3 percent increase in 2010), following a brief decline (3.5 percent) 3M 2009. in 3M 3M
Samsung GE GE The recovery in R&D spend after the worst recession in generations is much faster than it was after the dot-comMicrosoft the beginning of thisGE bust at century. Toyota Microsoft IBM Microsoft Although companies are still feeling the lingering effects of the global economic downturn, many seem to recognize the long-term value associated with R&D P&G Samsung Toyota investment. IBM P&G P&G Tie This strong R&D recovery ($100 billion increase in the past two years alone) may Samsung Toyota IBM signal a jobs recovery, especially in North America, where the largest portion of the How Intel Facebook Amazon do we create value? absolute spending growth originates. Google Google Google

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R&D Spending Is In Recovery (continued)

Automotive Gains, Health Loses in the Top 20 R&D Spenders
Guidelines: THE 2012 TOP 20 R&D SPENDERS 2012 Rank Company Geography Industry 2011 R&D Exp.; $Bn 11.0 million alkdflka 32.8% 30.1% = = = =

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Toyota Novartis Roche Holding Pfizer Microsoft Samsung Merck Intel General Motors Nokia Volkswagen Johnson & Johnson Sanofi Panasonic Honda GlaxoSmithKline IBM Cisco Systems Daimler AstraZeneca

Japan Europe Europe North America North America Asia North America North America North America Europe Europe North America Europe Japan Japan Europe North America North America Europe Europe

Auto Healthcare Healthcare Healthcare Software and Internet Computing and Electronics Healthcare Computing and Electronics Auto Computing and Electronics Auto Healthcare Healthcare Computing and Electronics Auto Healthcare Computing and Electronics Computing and Electronics Auto Healthcare TOTAL

$9.9 $9.6 $9.4 $9.1 $9.0 $9.0 $8.5 $8.4 $8.1 $7.8 $7.7 $7.5 $6.7 $6.6 $6.6 $6.3 $6.3 $5.8 $5.8 $5.5 $153.6

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The top 20 R&D spenders collectively invested $154 billion on R&D in 2011 26 percent of the Global Innovation 1000 spend. Auto companies increased their rank in the top spender list: - The auto companies among the top 20 spenders in 2010 either moved up in the rankings or stayed the same in 2011. - R&D investment is becoming more critical as auto companies seek to meet ever more stringent fuel economy standards, boost the electronics in their cars, develop common platforms around the globe, and attract younger buyers. Although the healthcare companies dominate the list, they have decreased their rank in the top spender list: - Of the eight healthcare companies in the top 20 spenders in 2010, all but Novartis and Sanofi fell in the rankings in 2011. - Given the recent dearth of successful product introductions, many healthcare companies are hesitant to continue investing in innovation, choosing instead to steer profits to shareholders. Regulatory uncertainty has also taken its toll: large pharmaceutical companies appear reluctant to invest in R&D without a clear path to market.

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R&D Spending Is In Recovery (continued)

Computing and Electronics, Healthcare, and Auto Industries Top R&D Spending
Guidelines: 2011 R&D SPEND BY INDUSTRY ($603 BILLION TOTAL) Telecom 2% Consumer 3% Aerospace and Defense 4% Other 2% 11.0 million alkdflka 32.8% 30.1%

Software and Internet 7% Computing and Electronics 28%

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Chemicals and Energy 7%

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Industrials 10% Healthcare 21%

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Auto 16%

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Source: Bloomberg data, Booz & Company

The top three industries with the greatest R&D investment continued to be: - Computing and Electronics (28 percent of total Global Innovation 1000 spend) - Healthcare (21 percent of total Global Innovation 1000 spend) - Auto (16 percent of total Global Innovation 1000 spend)

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R&D Spending Is In Recovery (continued)

Two-thirds of the $53 billion spending increase came from the Computing and Electronics, Auto, and Industrials sectors
Guidelines: CHANGE IN 20102011 R&D SPEND BY INDUSTRY; $MILLION 11.0 million alkdflka

Spend D)

While Healthcare is the third largest While Health is the third largest spender, Industrials experienced the spender, Industrials experienced the third largest absolute spend increase third largest absolute spend increase

$3,607 $6,037

$1,718

$1,655

$352 $1,487

$52,632
32.8% 30.1%

$6,229 $7,867 $13,214

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Increases Decreases
Represents 66% of total R&D spend increase

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$13,440

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Computing and Electronics Auto Industrials Software and Internet Healthcare Chemicals and Energy Other Consumer Telecom Aerospace and Defense Total

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Sources: Bloomberg data; Booz & Company Innovation 1000 articles in strategy + business; Booz & Company analysis

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65 percent of the overall $53 billion growth in R&D spend in 2011 came from the Computing and Electronics, Auto, and Industrials sectors. Though Healthcare was the second-largest spender on R&D in the Global Innovation 1000, it experienced only the fifth-largest increase in spend.

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R&D Spending Is In Recovery (continued)

India and China Outpace Other Regions in R&D Spend Growth, Though from a Small Base
Guidelines: 2011 R&D SPEND BY REGION $603 BILLION TOTAL India/China 2.7% 32.8% Rest of World 6.1% 30.1% = = 11.0 million alkdflka = =

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Letter format: - width for 3 columns: 16 - width for 2 columns: 11 Europe 29.9%

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Nearly 70 percent of the total Global Innovation 1000 spend is concentrated in North America and Europe. India and China, with 3 percent of the total R&D spend, play a minor but growing role.

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spender, Industrials experienced the America experienced the largest third largest absolute spend increase absolute spend increase

Electronics

Sources: Bloomberg data

Increases

R&D Spending Is In Recovery (continued)

Guidelines: CHANGE IN 20102011 R&D SPEND BY REGION; $MILLION CHANGE (%) IN R&D SPEND BY REGION 20102011 11.0 million alkdflka 32.8% $3,434 $3,912 24% 20% $14,736 16% 12% $18,126 8% 4% 0% 12.2% 9.7% 5.4% 2.4% Average 9.6% $52,632 28% 27.2% 30.1% = = = =

Decreases

n R&D USD)

000

000

000

While India/China experienced the greatest percentage increase in R&D spend, North America $12,424 experienced the largest absolute spend increase

000

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000

000

000

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000

000

000

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000 0 North America Europe Japan India/ China Rest of World Total

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India/ China

Rest of World

North America

Europe

Japan

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Sources: Bloomberg data; Booz & Company Innovation 1000 articles strategy+business; Booz & Company analysis

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North America and Europe were the largest contributors to the overall R&D spend growth in 2011; more than 60 percent of the increase came from these regions. India and China contributed 7 percent to the overall R&D spend increase. India and China had the strongest relative growth in R&D spending. North America was above average, while Europe and Japan lagged behind. - India- and China-based firms increased R&D spend by a phenomenal 27 percent over the previous year, albeit from a small spend base. It is also worth noting that their combined rate of growth was down from 38.5 percent in 2010, which may reflect the cooling down of the Chinese economy. - Companies headquartered in North America grew their R&D spending at a slightly above-average rate of 9.7 percent. - Europe and Japan grew at below-average rates of 5.4 percent and 2.4 percent, respectively.

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Europe 29.91%

While India/China experienced the While Health R&D third largest greatest % in is thespend, North spender, Industrials experienced the America experienced the largest third largest absolute spend increase absolute spend increase

an Electr

Sources: Bloomberg

2011 R&D SPEND BY REGION ($603 BILLION)

R&D Spending Is In Recovery (continued) Decreases

Increases

5.4%

India and China have been steadily gaining share in R&D spending but are gaining revenue share at an even faster rate
Guidelines: GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION 20082011 1.0% 4.9% 24.4% 21.3% 4.3% 9.5% 1.5% 5.3% 22.6% 21.7% 4.2% 9.6% 2.3% 6.1% 23.3% 21.1% 30.1% 34.5% 32.4% 7.3% 11.7% 23.3% 20.1% India/China Rest of World 33.6% Japan Europe North America 38.6% 29.9% 38.5% 30.0% 38.3% 37.9% 2.7% 6.1% 8.5% 10.5% 11.0 million alkdflka 32.8% 30.1%

31.1% 35.0%

32.1%

29.9%

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27.4%

27.3%

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s in 000

R&D Spend

Revenue

R&D Spend

Revenue

R&D Spend

Revenue

R&D Spend

Revenue

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2008

2009

2010

2011

Note: Please always d otherwise InDes file. These colors ca China HQ India HQ 15 4 23 6 40 10 47 9

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India and China are steadily gaining share in R&D spending, at a faster year-on-year rate than their proportionate gain in revenue. In 2008, India- and China-based firms Sources: Bloomberg data; Booz & Company accounted for 4.3 percent business;revenue generated by the Global Innovation 1000 Innovation 1000 articles in strategy + of the Booz & Company analysis companies; today that number has risen to 8.5 percent. Because Chinas economy is much larger than Indias, and far more of its companies appear in the Global Innovation 1000 (47 companies from China, compared with just nine from India), China accounted for more than 90 percent of the two countries spending. More than half of all the Global Innovation 1000 companies that are headquartered in India and China are from the Chemicals, Energy, Construction, and Mining sectors all historically low spenders on R&D. The high growth rates of R&D spending in India and China may well continue (or even accelerate) as these countries continue to develop more R&D-intensive sectors such as Computing and Electronics or Auto.

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and Electroni

Sources: Bloomberg d

Spending Innovation
Guidelines: PERFORMANCE OF THE TOP 10 MOST INNOVATIVE COMPANIES VS. TOP R&D SPENDERS 11.0 million alkdflka 32.8% 30.1%
65% 62%

Highest Possible Score: 100%

68% 54%

Normalized Performance of Industry Peers: 50%

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45% 40%

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Revenue Growth 5-yr. CAGR EBITDA as % of Revenue 5-yr. Avg. Market Cap Growth 5-yr. CAGR

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Top 10 Most Innovative

Top 10 R&D Spenders

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Source: Bloomberg data, Booz & Company

Once again, there are significant differences in performance between the Top 10 Most Innovative Companies and the top 10 R&D spenders. The 10 Most Innovative Companies outpace the top 10 R&D spenders on three key financial metrics: revenue growth, market cap growth, and EBITDA as a percent of revenue.

GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION on revenue growth and market cap growth. 20082011 1.0% 4.9% 24.4% 21.3% 4.3% 9.5%

The top 10 R&D spenders also lag their industry peers in the Global Innovation 1000

31.1% 35.0%

1.5% 2.3% 4.2% Interesting to note is the limited 6.1% overlap 7.3% between 2.7%top 10 R&D spenders and the 10 the 6.1% 8.5% 5.3% 9.6% Most Innovative Companies list: 11.7% 10.5% - Only 22.6% Toyota, Microsoft, and 23.3% Samsung are among both the Top10 Most Innovative 23.3% 21.7% Companies and the top 10 R&D spenders. 20.1% 21.1% India/China - Although there are four healthcare companies among the top 10 spenders (Novartis, Roche, Pfizer, and Merck), no healthcare organization made it into the 10 Most Rest of World 32.1% 30.1% 29.9% Innovative Companies. Japan 34.5% 32.4% 33.6%

38.6%

29.9%

This reinforces our long-standing finding that a companys financial performance America and North innovativeness do not correlate with how much it spends on R&D, but rather with how 38.5% 38.3% 37.9% well it executes its innovation strategy.
30.0% 27.4% 27.3%

Europe

# Companies in Innovation 1000 China HQ India HQ

R&D 2008

Revenue 2008 15 4

R&D 2009

Revenue 2009 23 6

R&D 2010

Revenue 2010 40 10

R&D 2011

Revenue 2011 47 9

Sources: Bloomberg data; Booz & Company Innovation 1000 articles in strategy + business; Booz & Company analysis

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Weve Got No Idea

Performance at Idea Generation and Idea Conversion
Guidelines: 11.0 million alkdflka 32.8% Highly Effective

11%

25%

30.1%

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Marginally Effective

46%

18%

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Idea Generation

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Perhaps the most surprising result of this years study of the front-end of the innovation process is just how many companies say they simply arent very good at it. A full 46 percent of respondents say their companies are just marginally effective or average at generating ideas and converting them to commercial projects. A similar proportion (40 percent) told us last year that their companys culture did not support efforts to come up with new ideas. It is clear that many companies have yet to master the right mix of factors to foster sustained innovation.

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Matthew Ganz, vice president and general manager of research and technology at the Boeing Company: If you have a creative idea and it doesnt create value, its not technology. Its art. If youre all about value creation with no creativity, the accountants are going to take over. You need to prime the pump with creative ideas, and then you need to have rigorous processes in place to turn those ideas into dollars.

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and Electron

Sources: Bloomberg d

WeveSource: Bloomberg data, Booz & Company Got No Idea (continued)

Financial Success vs. Idea-Generation Performance

Top 10 Most Innovative

Top 10 R&D Spenders

Guidelines: FINANCIAL COMPARISON OF IDEA GENERATION PERFORMANCE Highest Possible Score: 100% FINANCIAL COMPARISON OF IDEA CONVERSION PERFORMANCE 11.0 million alkdflka 32.8% 30.1% 65% Normalized Performance of Industry Peers: 50% 50% 52% 54% 50% 42% 60% 58% 49%

56%

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46%

45%

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Revenue Growth 5-yr. CAGR

EBITDA as % of Revenue 5-yr. Avg.

Market Cap Growth 5-yr. CAGR

Revenue Growth 5-yr. CAGR

EBITDA as % of Revenue 5-yr. Avg.

Market Cap Growth 5-yr. CAGR

Strongly Effective

Marginally Effective

Strongly Effective

Marginally Effective

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Most of the 25 percent of survey respondents who said their companies were highly effective at both ideation and conversion also reported that they outperformed their peers on three important financial measuresrevenue growth, market cap growth, and EBITDA as a percentage of revenue.
GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION financial performance is a worrisome finding for the many companies 20082011 1.0% 4.9% 24.4% 21.3% 4.3% 9.5% 1.5% 5.3% 22.6% 21.7% 4.2% 9.6% 2.3% 6.1% 23.3% 21.1% 30.1% 34.5% 32.4% 7.3% 11.7% 23.3% 20.1% India/China Rest of World 33.6% Japan Europe North America 38.6% 29.9% 38.5% 30.0% 38.3% 37.9% 2.7% 6.1% 8.5% 10.5%

This correlation between effectiveness at the early stages of innovation and superior that struggle at the front end.

31.1% 35.0%

32.1%

29.9%

27.4%

27.3%

# Companies in Innovation 1000 China HQ India HQ

R&D 2008

Revenue 2008 15 4

R&D 2009

Revenue 2009 23 6

R&D 2010

Revenue 2010 40 10

R&D 2011

Revenue 2011 47 9

Sources: Bloomberg data; Booz & Company Innovation 1000 articles in strategy + business; Booz & Company analysis

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Sources: Bloom

Conversion Isnt EasyMajority of Ideas Dont Take Off Source: Bloomberg data, Booz & Company

Guidelines: PERCENTAGE OF IDEAS THAT MOVE TO DEVELOPMENT AND FULL COMMERCIALIZATION

11.0 million alkdflka 32.8% 30.1%

Approximately what percentage of your organizations ideas become product or service concepts that move to full development projects?
12% 70%100% of ideas

Approximately what percentage of your organizations product or service development projects are launched into the market?

23%

70%100% of ideas

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43%

1%20% of ideas

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GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION 20082011 1.0% 4.9% 24.4% 1.5% 2.3% 4.2% 4.3% converted to full development projects. 5.3% 6.1% 9.5% 9.6% 7.3% 11.7% 2.7%

The process of choosing which ideas to convert to full-scale product development is perhaps even more critical to a companys innovation success than the actual generation of ideas. The conversion stage is the point at which companies use all the processes and tools at their command to decide whether a given idea in the pipeline is a go or a nogo for a full-scale commercialization project. In the view of many innovation experts, this is where the most value is added. Nearly half of respondents reported that fewer than 20 percent of their projects were
6.1% 8.5% 10.5%

ge

22.6% Of the projects that do move to full development, fewer than 20 percent are converted 23.3% 23.3% 21.3% into commercialized 21.7% projects, according to 43 percent of survey respondents. 20.1% 21.1%

India/China

31.1%

Survey results show that the smaller companies in the Global Innovation 1000 (those 32.1% 30.1% 29.9% ranked 101-1000) rank themselves twice as effective at the twice as effective at Japan the 35.0% 34.5% 33.6% 32.4% conversion stage as the top 100 spenderslikely due to these organizations having an Europe easier time converting ideas since they are smaller, more focused organizations. North America
29.9% 38.5% 30.0% 38.3% 27.4% 37.9% 27.3%

38.6%

# Companies in Innovation 1000 China HQ India HQ

R&D 2008

Revenue 2008 15 4

R&D 2009

Revenue 2009 23 6

R&D 2010

Revenue 2010 40 10

R&D 2011

Revenue 2011 47 9

Sources: Bloomberg data; Booz & Company Innovation 1000 articles in strategy + business; Booz & Company analysis

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Darlene Solomon, chief technology officer of the measurement company Agilent Technologies: In managing the conversion funnel, were constantly asking ourselves, What have we learned about the technology that makes it more or less attractive than a year ago? What have we learned about the market and the competition that might help us decide whether the technology is even more valuable or more of a me-too technology now? Whats changed within Agilent in terms of our business priorities, and how might this influence whether this is something that we want to continue investing in?

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India HQ

10

Elec

Sources: Bloomb

Tried and True Rules

Guidelines: TOP 5 RANKING FOR WHICH OF THE FOLLOWING TOOLS AND MECHANISMS, IF ANY, DOES YOUR ORGANIZATION USE TO GENERATE NEW IDEAS? ALL RESPONDENTS (N = 685) Recoded Mean 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Direct Customer Observation Traditional Market Research Feedback from Sales and Customer Support Idea Work-Out Sessions Technology Road Mapping All other categories (<15% each) 22% 19% 18% 15% 31% 42%
Includes "social media network mining", "seed funding for exploratory research", "external idea scouting", and "cross business unit communities/sharing

11.0 million alkdflka 32.8% 30.1%

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Note: Please force-rank up to five of the following tools in order to influence by ranking the most influential mechanism 1st, the next most influential mechanism 2nd and so on. Responses above reflect the recoded means, that is, responses of 1 or 2 = 1, all others = 0

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Few companies succeed at innovation without ensuring that adequate processes are in place to generate new ideas, and that those processes are followed in a disciplined fashion. Despite recent high-profile coverage of companies seeking innovative ideas from social networks, the wisdom of crowds, and open innovation contests, in reality, the majority of new ideas still come from traditional sources. By far the most popular method for generating ideas is direct customer observation (ranked as one of the Top 5 most used methods by 42 percent of survey respondents). Other categories that were cited by less than 15% of respondents included tools such "social media network mining", "seed funding for exploratory research", "external idea scouting", and "cross business unit communities/sharing".

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India HQ

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Sources: Bloomberg

Tried and True Rules (continued)

Social Networks are the least influential idea generation mechanisms for engineered products industries like Auto, Industrials, and Aerospace and Defense
INDUSTRY BREAKOUT OF RESPONDENTS RANKING SOCIAL NETWORKS WITHIN THE TWO MOST USED TOOLS FOR GENERATING IDEAS Recoded Mean 15% 15% 32.8% 30.1% 11% 10% 10% Average Across Industries >10% 7% 6% 5% 3% 3% 2% 0% Software and Internet Healthcare Chemicals and Energy Computing and Electronics Consumer Auto Industrials Telecom Aerospace and Defense Guidelines: 11.0 million alkdflka

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0%

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Social Networks were ranked among the least commonly used "tools and mechanisms" for generating ideas; fewer than 10 percent of respondents ranked it among their top tools for idea generation. Highly engineered products industries like Auto, Industrials, and Aerospace and Defense were the least likely to use these mechanisms.

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43%

0%20%

Electronics

Sources: Bloomberg data; Bo

Change in R&D Spe (Million USD)

55,000

Source: Bloomberg data, Booz Company Approximately what percentage of&your organizations product or service development projects are Five years ago, Booz & Companys research showed that nearly every company follows one of three fundamental innovation strategy launched into the market?

Innovation Strategy Models

50,000 45,000 40,000

Guidelines: 35,000 11.0 million 30,000 = =

W W spen spen third third

modelsthey are Need Seekers, Market Readers, and Technology Driversand each model has its own distinct approach to the innovation process and to the customers and markets the companies serve.
23%

S i

70%100%

INNOVATION STRATEGY MODELS

68%

65%

25,000 alkdflka
62%

NEED SEEKERS

33%

30%60%

Need Seekers, 54% as Apple and Procter & Gamble, make a point of engaging such customers directly to generate new ideas and help shape new products and services based on superior end-user understanding. Their goal: to seek out both articulated and unarticulated needs, and then to try to get their new products to market first. Market Readers, such as Hyundai and Caterpillar, use a variety of means to generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to their products. This implies a more cautious approach, one that depends on being fast followers in the marketplace. Technology Drivers, such as Google and Bosch, depend more on their internal technological capabilities to develop new products and services, leveraging their R&D investments to drive both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology.

20,000
32.8%
45%

P B

15,000

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30.1% 10,000

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5,000 0 TABLE HEADINGS

MARKET READERS

Computi

43%

0%20%

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TECHNOLOGY DRIVERS

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Source: Bloomberg data, Booz & Company

The types of techniques and tools companies employ to convert ideas depend in large part on each companys innovation strategy.

FRONT-END TOOLS, MECHANISMS, AND STRUCTURES EMPLOYED BY COMPANIES

Market Readers Top Ranked Front-End Mechanisms Top Ranked Internal Network Structures - Sales & Customer Support Feedback - Communities of Practice - Organized Conferences w/Technical staff - Traditional Market Research

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Approved Colors, Tint 32.8% = 30.1%

All Three Need Seekers Top Ranked Front-End Mechanisms - Idea Work-out Sessions - End-user focus groups Top Ranked Internal Network Structure - Focused Technical Innovation Networks across the business Top Ranked Front-End Mechanism - Direct Customer Observation Top Ranked Internal Network Structures - Innovation Champions - Cross-unit Staffing (non-rotational) Top Ranked External Network Structures - Customers - Channel Partners & Suppliers Tech Drivers Top Ranked Front-End Mechanisms - Technology Road-mapping - Meetings w/ External Technical Community Top Ranked Internal Network Structures - IT Collaboration Tools - Facilities Layout

TABLE HEADIN

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No distinct difference in External networks by strategy model

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Respondents from companies identified as following a Need Seekers strategy reported to be the most effective among the strategy models at both the idea-generation and conversion stages. - A full 50 percent of Need Seekers reported being highly effective at both. - Just 12 percent of Market Readers and 20 percent of Technology Drivers reported being highly effective at both. It is important to remember that companies can significantly outperform their peers no matter which of the three strategies they follow. A far more critical factor is how well they follow their chosen innovation strategy. Companies that align their innovation strategy to their business strategy, capabilities, internal cultural support for innovation, and front-end processes have a distinct advantage in the race for new ideas, products, and services.
- Market Readers, such as Hyundai and Caterpillar, use a variety of means to generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to their products. This implies a more cautious approach, one that depends on being fast followers in the marketplace.

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Approved Colors

NEED SEEKERS

MARKET READERS

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TECHNOLOGY DRIVERS - Technology Drivers, such as Google and Bosch, depend more on their internal technological capabilities to develop new products and services, leveraging their R&D investments to drive both breakthrough innovation and incremental change,

Booz & Company

METHODOLOGY

Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2011 (companies for which public data on R&D spending was available). To be included, companies had to make data on their R&D spending public; all analysis is based on the most recent annual financial data published as of June 30, 2012. Subsidiaries that were more than 50 percent owned by a single corporate parent were excluded if their financial results were included in the parent companys financials. This is the same approach used in the previous seven years in which the study was conducted. Booz & Company analyzed key financial metrics for each of the top 1,000 companies over the past decadeincluding sales, gross profit, operating profit, net profit, R&D expenditure, and market capitalization. All foreign currency sales and R&D expenditure figures prior to 2011 were translated into U.S. dollars according to the average exchange rate in 2011. Each company was coded into one of nine industry sectors (or other) according to Bloombergs industry designations and into one of five regions as determined by each companys reported headquarters location. To enable meaningful comparisons across industries, Booz & Company indexed the R&D spending levels and financial performance metrics for each company against the industry groups median values. Figures for total shareholder return were gathered and adjusted to reflect each companys total shareholder return in its local market and to control for local market performance fluctuations. Booz & Company conducted a separate online survey of nearly 700 innovation leaders in companies around the world to explore how companies employ various tools, processes, mechanisms, and networks in the front-end phases of innovation as they relate to successful innovation and financial performance. Survey respondents were also asked a series of questions to help classify their companies into one of our three innovation strategy models: Need Seekers, Market Readers, or Technology Drivers. The classification of each company into one of these three models is based on an algorithm applied to their answers to our four profiling questions.

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Booz & Company

Booz & Company is a leading global management consulting firm focused on serving and shaping the senior agenda of the worlds leading institutions. Our founder, Edwin Booz, launched the profession when he established the first management consulting firm in Chicago in 1914. Today, we operate globally with more than 3,000 people in 58 offices around the world. We believe passionately that essential advantage lies within and that a few differentiating capabilities drive any organizations identity and success. We work with our clients to discover and build those capabilities that give them the right to win their chosen markets. We are a firm of practical strategists known for our functional expertise, industry foresight, and sleeves rolled up approach to working with our clients. To learn more about Booz & Company or to access its thought leadership, visit booz.com. Our awardwinning management magazine, strategy+business, is available at strategy-business.com.

2012 Booz & Company Inc.

Booz & Company