How We Rank The Most Innovative Companies 2017 – Jeff Dyer and Hal Gregersen

Jeff Dyer, Horace Beesley Professor of Strategy at the Marriott School of Management at Brigham Young University

Hal Gregersen, Executive Director of the MIT Leadership Center

Hal Gregersen, Executive Director of the MIT Leadership Center

From Forbes

Most innovation rankings are popularity contests based on past performance or editorial whims. We set out to create something very different with the World’s Most Innovative Companies list, using the wisdom of the crowd. Our method relies on investors’ ability to identify firms they expect to be innovative now and in the future. You can learn more about our research on innovation at The Innovator’s DNA website.

Companies are ranked by their innovation premium: the difference between their market capitalization and the net present value of cash flows from existing businesses (based on a proprietary algorithm from Credit Suisse HOLT). The difference between them is the bonus given by equity investors on the educated hunch that the company will continue to come up with profitable new growth.

To be included, firms need seven years of public financial data and $10 billion in market cap. (Facebook, for example, would rank high on the list if we used only the data since they went public.) We include only industries that are known to invest in innovation, excluding industries that have no measurable investment in R&D, so banks and other financial services don’t make the list. Nor do energy and mining firms, whose market value is tied more to commodity prices than innovation. Big caveat: Our picks do not correlate with subsequent investor returns. To the extent that today’s share price embeds high-growth expectations, one might even anticipate low returns to investors, as these expectations may be difficult to meet.

We use something called the Innovation Premium to compile our list. It is calculated first by projecting the cash flows a company produces from its existing businesses without any growth and look at the net present value (NPV) of those cash flows. We compare this base value of the existing business with the company’s current total Enterprise Value (EV): Companies with an EV above their base value have an innovation premium built into their stock price. You can read a more detailed explanation of our work around innovative companies and leaders in our book The Innovator’s DNA (Harvard Business Press, 2011), written with Harvard Business School professor Clayton Christensen. The following steps outline this approach in greater detail:

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Whole Foods CEO’s poor excuse for poor performance – Jose Alvarez and Zeynep Ton

Harvard Business School Senior Lecturer Jose Alvarez

At a town hall meeting announcing Amazon’s purchase of Whole Foods, a Whole Foods employee had this question for CEO John Mackey:

“I have a question about Whole Foods’s commitment to those win-win-win-win partnerships with our suppliers, with our team members— and how that’s going to live on once this merger is complete.”

Mackey’s response was curious, to say the least:

MIT Sloan Adjunct Associate Professor Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

“I think, sometimes, our company’s gone a little bit too much team-member focus at the expense of our customers. And that’s one definite evolution that’s gonna happen. I love the passion these guys [Amazon] have around the customer. They put the customer first in everything they do and think backwards. And— we— we’re gonna be the same way.”

If Mackey thinks that investing in people is part of the reason for Whole Foods’s poor performance, he’s wrong. From what we see, the real problem is a lack of operational excellence. Whole Foods may be paying its employees more than competitors do, but it has not created an operating system that leverages that investment. You can’t put premium gas in a clogged-up engine and expect to win a race.

Whole Foods strikes us as an organization that doesn’t standardize where it needs to and doesn’t empower where it needs to. Five stores within a city may have five different people purchasing from the same local farm in five different ways. Their information systems are mediocre at best.  John Mackey’s own words about Whole Foods technology are useful here: “So I think that we can expect that we’ll go to the front of the class, eventually, in the grocery business, from … the class dunce to… the class valedictorian.”

Poor systems and lack of appropriate standardization mean lower labor productivity and higher costs. At the same time, frontline team members appear to have little empowerment to satisfy customers. One of us recently wanted to return a $3 Whole Foods reusable shopping bag that had broken the first time it was used.  You would expect the cashier to just exchange the bag for a new one.  Instead, she called for her manager to resolve the problem.  It was a waste of time for all, including the other customers waiting in line. Paying team members more than competitors do won’t pay off if you don’t empower them to make a $3 decision! Lack of empowerment reduces not only motivation but also customer service.

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How should companies operate in the age of Trump? – Daena Giardella

Daena Giardella, MIT Sloan Sr. Lecturer

From The Hill

“Sensemaking,” one of the four leadership capabilities, is the ability to make sense of what is happening in the greater marketplace and discern emerging changes and patterns. In the era of President Trump, business leaders and CEOs need to shift their sensemaking skills into high gear. Along with that, they may have to exercise Improvisational Leadership skills in the Trump universe.

CEOs, like the rest of the country, are faced with the challenge of making sense of Trump’s policies and actions, but his favorite method of communication – Twitter – sows chaos not clarity. Typically, when CEOs or leaders want to convey an important message, they talk to key stakeholders, convene a meeting, or give a nuanced speech to build relationships and foster buy-in with targeted audiences. A tweet has no eye contact, nod, smile, or handshake. A tweet’s brevity can foster confusion because it has no context.

Tweets by the president singling out specific companies with thumbs up or down can rattle markets, precipitate boycotts, unnerve CEOs and boards, and affect stock prices – if however briefly.But even if they dislike Trump’s tweets, many business leaders are encouraged by the president’s attitude about rolling back regulations; his comments about reducing taxes are music to their ears. However, a reflexive decision to placate or ingratiate oneself to any powerful figure, even the President, may prove to be a big mistake. Trump may be gone in four years, or even sooner, but your customer and client base will be with you for decades.

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A conversation with Chris Knittel: Uber and racial discrimination

MIT Sloan Professor Christopher Knittel

MIT Sloan Professor Christopher Knittel

We hope you enjoy the latest installment of the MIT Sloan Expert Series

See the conversation recorded Feb. 15, 2017 with Chris Knittel, professor of applied economics at MIT Sloan, who talks about his latest research on racial bias in the sharing economy—how Uber and Lyft are failing black passengers and what to do about it.

Eva Millona, the Executive Director of the Massachusetts Immigrant and Refugee Advocacy Coalition (MIRA) also appears on the program to discuss ways Uber and Lyft can work on mitigating discrimination.

 

#MITSloanExperts Twitter Chat: Ridesharing Services and Racial Discrimination

MIT Sloan Professor Christopher Knittel

MIT Sloan’s Christopher Knittel, Professor of Applied Economics, and associate editor of The American Economic Journal—Economic Policy, The Journal of Industrial Economics, and the Journal of Energy Markets, spoke with reporter and author Josh Levs during an #MITSloanExperts Twitter chat. During this chat, the men spoke about Professor Knittel’s research on racial discrimination in the ride sharing industry and discussed how ridesharing apps like Uber and Lyft can better contend with this issue.

Professor Knittel will continue this discussion on February 15th during a LiveStream event hosted by MIT Sloan. Read More »