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
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:
President Donald Trump’s memorandum establishing the White House Office of American Innovation sounds great. It appoints his son-in-law, Jared Kushner, as its head and aspires to “bring together the best ideas from government, the private sector, and other thought leaders to ensure that America is ready to solve today’s most intractable problems.”
We hear lots of talk in the business community about the need to innovate to stay ahead of the competition. But what does “innovation” really mean? Merriam-Webster defines it as “a new idea, device, or method.” If Trump and Kushner intend to import the private sector’s ideas, devices, or methods into government, we should take a closer look at how innovation works in the business world.
The federal government is a large organization; in fact, it is the largest employer in the U.S. followed by Walmart. So if innovation is going to work in the federal government, it would need to follow the same model of innovation at large private sector organizations.
But the tough truth is that it’s really hard to innovate in large private sector organizations. There are really only two ways to do so effectively: acquire those that innovate or innovate internally.
We know what productivity growth requires: investments in new technology. For previous generations, this was factories full of machines, first powered by steam and then by electricity. More recently it was the arrival of computers, which changed how work was organized within and across firms.
We often perceive the impact of new technology imperfectly and with a lag, and today is no different. We can see a wave of hardware and software innovations underway — technologies such as 3D printing and distributed ledgers will allow manufacturing and finance to become more dispersed — but it is hard to know exactly where it will take us.
Paul Michelman, editor-in-chief of MIT Sloan Management Review
Within the next five years, how will technology change the practice of management in a way we have not yet witnessed?
MIT Sloan Management Review posed this question to 15 of the world’s foremost experts on the intersection of technology and management who responded in a series of essays available in MIT SMR’s new Fall issue, published online today. The essays were commissioned to celebrate the launch of the magazine’s new Frontiers initiative. Appearing as part of both the print and digital editions, Frontiers explores how technology is reshaping the practice of management.