1. strategy+business
FOrtHCOMinG in issue 65 WINTER 2011
THE GLOBAL INNOVATION 1000
Why Culture Is Key
Booz & Company’s annual study shows that
spending more on R&D won’t drive results.
The most crucial factors are strategic alignment
and a culture that supports innovation.
by baRRy jaRuzElskI, johN loEhR,
aNd RIchaRd holmaN
preprint 11404

2. features innovation
1

3. THE GLOBAL INNOVATION 1000
Why Culture
Is Key
BOOZ & COMPANY’S
features innovation
ANNUAL STUDY SHOWS
THAT SPENDING MORE ON
R&D WON’T DRIVE RESULTS.
THE MOST CRUCIAL FACTORS
ARE STRATEGIC ALIGNMENT
BY AND A CULTURE
BARRY JARUZELSKI,
THAT SUPPORTS
JOHN LOEHR, AND
RICHARD HOLMAN INNOVATION.
2
The elements that make up a truly innovative com- panies with unsupportive cultures and poor strategic
pany are many: a focused innovation strategy, a win- alignment significantly underperform their competi-
ning overall business strategy, deep customer insight, tors. Moreover, most executives understand what’s at
great talent, and the right set of capabilities to achieve stake and what matters, even if their companies don’t
successful execution. More important than any of the always seem to get it right. Across the board, for ex-
individual elements, however, is the role played by cor- ample, respondents identified “superior product per-
porate culture — the organization’s self-sustaining pat- formance” and “superior product quality” as their top
terns of behaving, feeling, thinking, and believing — in strategic goals. And they asserted that their two most
Illustration by Leandro Castelao
tying them all together. Yet according to the results of important cultural attributes were “strong identification
this year’s Global Innovation 1000 study, only about with the consumer/customer experience” and a “pas-
half of all companies say their corporate culture robustly sion/pride in products.”
supports their innovation strategy. Moreover, about the These assertions were confirmed by innovation ex-
same proportion say their innovation strategy is inad- ecutives we interviewed for the study. Fred Palensky, ex-
equately aligned with their overall corporate strategy. ecutive vice president of research and development and
This disconnect, as the saying goes, is both a prob- chief technology officer (CTO) at innovation leader 3M
lem and an opportunity. Our data shows that com- Company, for example, puts it this way: “Our goal is to

4. Barry Jaruzelski John Loehr Richard Holman Also contributing to this article
barry.jaruzelski@booz.com john.loehr@booz.com richard.holman@booz.com were s+b contributing editor
is a partner with Booz & is a Booz & Company partner is a principal with Booz & Edward H. Baker and Booz
Company in Florham Park, based in the firm’s Chicago Company based in Florham & Company senior associate
N.J., and is the global leader office. He specializes in help- Park, N.J. He is a leader of Marc Johnson.
of the firm’s innovation prac- ing automotive, industrial, and the firm’s innovation practice,
tice and its engineered prod- aerospace companies reach a specializing in fields with
ucts and services business. He position of product and market highly engineered products,
works with high-tech and leadership through a combina- such as aerospace, industrial,
industrial clients on corporate tion of product strategy and and high tech.
and product strategy, product functional restructuring.
development efficiency and
effectiveness, and the trans-
formation of core innovation
processes.
include the voice of the customer at the basic research the ways R&D managers and corporate decision mak-
level and throughout the product development cycle, ers think about their new products and services — and
to enable our technical people to actually see how their how they feel about intangibles such as risk, creativity,
features innovation
technologies work in various market conditions.” openness, and collaboration — are critical for success.
If more companies could gain traction in closing As part of this year’s study, we surveyed almost 600 in-
both the strategic alignment and culture gaps to better novation leaders in companies around the world, large
realize these goals and attributes, not only would their and small, in every major industry sector. As noted, al-
financial performance improve, but the data suggests most half of the companies reported inadequate strate-
that the potential gains might be large enough to im- gic alignment and poor cultural support for their inno-
prove the overall growth rate of the global economy. vation strategies. Possibly even more surprising, nearly
To that end, we continue to emphasize the key 20 percent of companies said they didn’t have a well-
finding that our Global Innovation 1000 study of the defined innovation strategy at all.
world’s biggest spenders on research and development Understanding these issues is particularly impor-
has reaffirmed in each of the past seven years: There is tant now that innovation spending is on the rise again.
no statistically significant relationship between financial After last year’s 3.5 percent drop in global innovation
performance and innovation spending, in terms of either spending, the first-ever decline shown in the data we
total R&D dollars or R&D as a percentage of revenues. have tracked for more than a decade, R&D outlays
32
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Many companies — notably, Apple — consistently un- have recovered. Spending among the Global Innovation
derspend their peers on R&D investments while out- 1000 surged 9.3 percent in 2010, thanks in great part to
performing them on a broad range of measures of cor- the perception of a worldwide economic recovery. (See
porate success, such as revenue growth, profit growth, “Profiling the Global Innovation 1000,” page 5.)
margins, and total shareholder return. Meanwhile, en-
tire industries, such as pharmaceuticals, continue to de- The Alignment Gap
vote relatively large shares of their resources to innova- Issues of culture have long been of great concern to
tion, yet end up with much less to show for it than they corporate executives and management theorists alike,
— and their shareholders — might hope for. whether they apply to companies as a whole or to se-
Last year, we looked at the innovation capability lected areas such as innovation. The reason is obvious:
sets companies put together, how they vary by innova- Culture matters, enormously. Studies have shown again
tion strategy, and which groups of capabilities can best and again that there may be no more critical source of
strategy+business issue 65
enable companies to outperform their peers. This year, business success or failure than a company’s culture —
we took a different vantage point, analyzing the ways it trumps strategy and leadership. That isn’t to say that
that critical organizational systems and cultural attri- strategy doesn’t matter, but rather that the particular
butes support those capability sets that are most likely strategy a company employs will succeed only if it is sup-
to promote innovation success. The results suggest that ported by the appropriate cultural attributes. So when

5. Exhibit 1: The Alignment Advantage
Only 44 percent of companies surveyed have both highly aligned cultures
and highly aligned innovation strategies, and it pays off in performance:
They outperform on growth in both profits and enterprise value.
Innovation Strategy and Cultural Alignment Matrix
HIGH
9%
Cultural Support for Innovation Strategy
44%
we approached the topic of culture in the context of in-
novation for this year’s study, our primary goals were
MODERATE HIGH
to determine which cultural attributes were most criti-
features title of the article
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ALIGNMENT ALIGNMENT
cal to underpinning the focused capability sets required
for each distinct innovation strategy that we have previ-
ously identified.
27% 20%
The results are clear — and may explain why many
companies have difficulty making their substantial
LOW MODERATE R&D investments pay off. Overall, 36 percent of all re-
LOW
ALIGNMENT ALIGNMENT
spondents to our survey admitted that their innovation
LOW Alignment of Business Strategy to Innovation Strategy HIGH strategy is not well aligned to their company’s overall
strategy, and 47 percent said their company’s culture
does not support their innovation strategy. Not surpris-
Gross Profit Enterprise Value
Indexed mean of normalized Indexed mean of normalized
ingly, companies saddled with both poor alignment and
5-year CAGR 5-year CAGR poor cultural support perform at a much lower level
56
AVERAGE
ACROSS ALL
than well-aligned companies. In fact, companies with
COMPANIES
AVERAGE
ACROSS ALL 48
51 both highly aligned cultures and highly aligned innova-
COMPANIES 49 33
4
45 tion strategies have 30 percent higher enterprise value
44 growth and 17 percent higher profit growth than com-
42 43
panies with low degrees of alignment. (See Exhibit 1.)
On the other hand, companies whose strategic
goals are clear, and whose cultures strongly support
those goals, possess a huge advantage. 3M is a case in
point. Palensky articulates his company’s innovation
strategy clearly: “We call it ‘customer-inspired inno-
vation.’ Connect with the customer, find out their ar-
ticulated and unarticulated needs, and then determine
the capability at 3M that can be developed across the
company that could solve that customer’s problem in a
unique, proprietary, and sustainable way.”
Culture plays a critical role in this strategy, says
LOW MODERATE HIGH LOW MODERATE HIGH
Palensky. “For over 100 years, 3M has had a culture
ALIGNMENT ALIGNMENT ALIGNMENT ALIGNMENT ALIGNMENT ALIGNMENT
of interdependence, collaboration, even codependence.
Source: Booz & Company Our businesses are all interdependent and collaborative-

6. Profiling the Exhibit A: R&D and Sales
R&D spending rose 9.3 percent in 2010,
increase in R&D spending in 2010,
especially in certain industries and
Global Innovation returning to its long-term trajectory after
2009’s recession-induced decline. among larger companies, confirms
these companies’ continued willing-
1000 1997 base year = 1.0
3.0 ness to invest in new and improved
R&D Spending
products and services to respond
W
2.5
orldwide R&D spending to ever more competitive markets
Sales
among the Global Inno- 2.0 around the world. Fully 68 percent
vation 1000 rose at an annual rate 1.5
of companies increased spending in
of 9.3 percent to US$550 billion in 2010, compared with just 41 percent
1.0
2010, rebounding strongly from its R&D Spending in 2009.
as a % of Sales
recession-induced decline in 2009 0.5 R&D spending grew in all nine
— which had been the first fall in the sectors we track, but the comput-
more than 10 years of data we have 2000 ’05 ’10
ing and electronics, healthcare, and
studied. This year’s total spend- automotive sectors contributed the
Source: Booz & Company
ing was also 5.6 percent above the vast majority of the increase — 77
pre-recession total of $521 billion in crease in corporate revenues, but percent, or $36.1 billion — of the
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2008, marking a return to the long- this difference was logical, given total increase of $46.8 billion. (See
term growth trajectory for innova- that most companies had not cut Exhibit B.) The biggest absolute in-
tion spending. (See Exhibit A.) innovation spending in 2009 to the crease in R&D spending was in the
The 2010 increase in R&D same extent that they suffered de- computing and electronics sector,
spending was less than the Global creases in revenues and cut other which remained the top spender
Innovation 1000’s 15 percent in- expense areas that year. Thus, the among all industries, making up 28
ly connected to each other, across geographies, across companies strongly agree on the strategic goals that
businesses, and across industries. The key is culture.” matter most in achieving innovation success: “Superior
Despite their differences in performance, most product performance” and “superior product quality”
were ranked number one or two by a plurality of more
Exhibit 2: Top Innovation Goals than 40 percent of all respondents. Other goals, such as
Superior product performance and product quality were seen as the most
“developing low-cost products” and “speed-to-market,”
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important goals by a plurality of innovators, with much less priority for were given much lower priority. (See Exhibit 2.)
other goals, such as the success rate of new products.
Similarly, companies agree strongly on the cultural
Perceived Importance of Common Innovation Goals/Outcomes attributes that are most prevalent at their companies.
Superior product performance
More than 60 percent cited “strong identification with
the customer” as among the top two, and 50 percent
Superior product quality
chose “passion for and pride in products.” The lowest
Products customized to local markets
and geographies ranked was “tolerance for failure in the innovation pro-
Advantaged products and services cess.” (See Exhibit 3.) This finding, which contradicts
Developing low-cost products some of the academic research on the subject, raises se-
Products developed for multiple markets
rious questions about companies’ real appetite for risk
Speed-to-market of product
taking in their innovation practices.
developmentand introduction
In general, companies also continue to show a
strategy+business issue 65
Number of breakthrough products range of significant gaps in how their strategic goals and
Success rate of new-product
introductions
cultural attributes contribute to performance and sup-
MEAN RANKING OF IMPORTANCE 0 0.1 0.2 0.3 0.4 0.5 0.6
port their innovation. Companies that underperform
their peers have much to gain if they can close these
Source: Booz & Company
gaps and achieve much higher degrees of cultural and

7. Exhibit B: Change in R&D percent of the total. With 2010 rev- Exhibit C: 2010 Spending
Spending by Industry, 2009–2010 enues up 14.2 percent, the industry by Industry
The strong growth in 2010 R&D spending was increased spending on innovation Computing and electronics, healthcare, and
dominated by gains in computing and auto continue to dominate R&D spending —
electronics, healthcare, and auto. by 6.1 percent — to $16.9 billion. For making up 65 percent of the total.
the first time in the years we have
$US billions Computing and Electronics 28%
studied, however, no high-technolo-
Healthcare 22%
gy company was among the world’s
Computing top three spenders on R&D. Other 1%
and
Electronics $16.9 In healthcare, R&D expendi-
tures increased $10.4 billion, or 9 Auto 15%
NET
SPENDING
percent. This was the fastest rate Telecom
INCREASE 2%
$46.8 among the top three industries in Industrials 10%
Consumer Chemicals and Energy 7%
2010, in line with its 9 percent in- 3%
Software and Internet 8%
Healthcare $10.4
crease in revenues. That kept health- Aerospace and Defense 4%
Auto $8.8 care in second place among all in-
Industrials $4.5 dustries in terms of its share of total
R&D spending, at 22 percent. (See
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Source: Booz & Company
Chemicals
and Energy $2.3 Exhibit C.) And thanks to that high
Software and Internet $2.2
growth rate, healthcare companies 20. (See Exhibit D, page 7.) For the
Telecom $1.3
Aerospace — primarily pharmaceutical firms second year in a row, Roche Hold-
and Defense $1.1
— captured four of the top five spots ing Ltd. headed the list, spending
Consumer –$0.3
on the overall list of the Global Inno- $9.6 billion of its $45.7 billion in 2010
Other –$0.4
vation 1000, and eight out of the top (continued on page 8)
Source: Booz & Company
strategic alignment. We believe the way to do so lies in butes that any given company needs to foster, given its
gaining a greater understanding of the cultural attri- particular innovation strategy. Soma Somasundaram,
executive vice president of the Fluid Management seg-
Exhibit 3: Top Cultural Attributes ment at the Dover Corporation, describes the challenge
Companies agreed strongly on the two most important cultural this way: “Poor innovation performance is usually not
attributes. There was less unanimity on the importance of other
attributes, with very few citing tolerance for failure in innovation caused by a lack of ideas or lack of aspirations. What
as essential. 35
6
some companies lack is the structure needed to effec-
Perceived Importance of Cultural Attributes tively dedicate resources to innovation. It’s the lack of
will to develop a strategy that can balance today’s need
Strong identification with the customer and
an overall orientation toward the customer versus tomorrow’s.”
experience
Passion for and pride in the products and
services offered
Three Strategies
Reverence and respect for technical talent
and knowledge
As in previous years, this year we classified the compa-
nies that responded to our survey into the three core in-
Openness to new ideas from customers,
suppliers, competitors, and other industries novation strategies via our online Innovation Strategy
Culture of collaboration across functions Profiler. The profiler characterizes a company’s innova-
and geographies
tion strategy based on its approach to incremental versus
Sense of personal accountability for any and
all contributions to the innovation and breakthrough innovation and the role that end custom-
product development process
ers play in defining future product needs.
Tolerance for failure in the innovation process
• Need Seekers actively and directly engage both
MEAN RANKING OF IMPORTANCE 0 0.1 0.2 0.3 0.4 0.5 0.6 current and potential customers to help shape new prod-
ucts and services based on superior end-user understand-
Source: Booz & Company
ing. These companies often address unarticulated needs

8. Exhibit D: The Innovation Top 20
Roche Holding claimed the number one spot among the top 20 spenders for the second year running, and, for the first time, four of the top five slots
were held by pharmaceutical firms.
Rank Company R&D Spending Headquarters Industry
Location
2010, $US Change As a %
2010 2009 Millions from 2009 of Sales
1 1 Roche Holding $9,646 1.5% 21.1% Europe Healthcare
2 5 Pfizer $9,413 20.0% 13.9% North America Healthcare
3 6 Novartis $9,070 21.4% 17.9% Europe Healthcare
4 2 Microsoft $8,714 –3.3% 14.0% North America Software and Internet
5 14 Merck $8,591 53.0% 18.7% North America Healthcare
6 4 Toyota $8,546 0.7% 3.9% Asia Auto
7 10 Samsung $7,873 23.2% 5.9% Asia Computing and Electronics
8 3 Nokia $7,778 –0.8% 13.8% Europe Computing and Electronics
9 11 General Motors $6,962 16.0% 5.1% North America Auto
10 7 Johnson & Johnson $6,844 –2.0% 11.1% North America Healthcare
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11 13 Intel $6,576 16.3% 15.1% North America Computing and Electronics
12 18 Panasonic $6,176 10.7% 6.1% Asia Computing and Electronics
13 9 GlaxoSmithKline $6,127 0.3% 14.0% Europe Healthcare
14 15 Volkswagen $6,089 19.4% 3.6% Europe Auto
15 12 IBM $6,026 3.5% 6.0% North America Computing and Electronics
16 8 Sanofi-Aventis $5,838 –4.0% 14.5% Europe Healthcare
17 19 Honda $5,704 5.2% 5.5% Asia Auto
18 22 AstraZeneca $5,318 20.6% 16.0% Europe Healthcare
19 17 Cisco Systems $5,273 1.3% 13.2% North America Computing and Electronics
20 16 Siemens $5,217 –1.4% 5.1% Europe Industrials
TOP 20 TOTAL: $141,781 10.1% 11.2%
Avg. Avg.
Source: Bloomberg data, Booz & Company
36
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and then work to be first to market with the resulting egy it follows. A closer look at the survey results, how-
new products and services. ever, does suggest that companies perfecting one strat-
• Market Readers closely monitor both their cus- egy — the Need Seekers — are relatively advantaged.
tomers and competitors, but they maintain a more cau- They consistently demonstrate better achievement on a
tious approach. They focus largely on creating value number of strategic and cultural variables. Additionally,
through incremental innovations to their products and Need Seekers are more likely to financially outperform
being “fast followers” in the marketplace. their rivals than companies following one of the other
• Technology Drivers follow the direction suggested two strategies.
by their technological capabilities, leveraging their sus- Overall, for example, Need Seekers are more than
tained investments in R&D to drive both breakthrough three times as likely to report that their innovation
innovation and incremental change. They often seek to strategy is strongly aligned with their business strategy
strategy+business issue 65
solve the unarticulated needs of their customers through as other companies. And Need Seekers perceived their
leading-edge new technology. performance in carrying out the two most critical in-
Just as companies following any of these three strat- novation goals — “superior product performance” and
egies can succeed, so any company can manifest strong “superior product quality” — to be much higher than
strategic and cultural alignment, no matter which strat- did companies using either of the other two strategies.

9. (continued from page 6) Exhibit E: Change in R&D the rest of the world — continued to
revenues on innovation. That works Spending by Region, 2009–2010 boom, albeit from a small base. Af-
out to an R&D intensity rate of more China and India, although they account for a ter having increased spending more
small share of total R&D spending, had by far
than 21 percent, 11 percentage points the fastest growth rate. than 40 percent the year before, In-
above the industry average. Automo- dian and Chinese companies almost
tive companies were also absent 38.5% matched that rate again in 2010, up-
from the top-spender slots: Toyota, ping their investments in R&D more
which had been number one in R&D than 38 percent. And companies
spending for several years before from other regions around the world
the recession, fell to sixth place in increased their spending almost 14
2010, having increased its spend- percent. (See Exhibit E.)
ing less than 1 percent in 2010, after 13.9%
AVERAGE
GROWTH
The downturn in innovation
cutting it almost 20 percent in 2009. 10.5% 9.3%
spending in 2009 was a clear indica-
Overall, however, the auto sector 5.8% tion of just how difficult the econom-
1.8%
boosted spending by $8.8 billion, or ic environment had been for many
India/ Rest of North Europe Japan
8 percent, in 2010, after having cut China World America companies; it was both surprising
R&D outlays by 14 percent in 2009. and encouraging that R&D spending
features title of the article
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Source: Bloomberg data, Booz & Company
That kept it in third place among fell as little as it did. Similarly, the
all industries in terms of total R&D — all cut back. The turnaround was healthy increase in 2010 shows just
spending. Revenues for the automo- cautious in both Europe and Ja- how determined companies are to
tive sector in 2010 were up 16.5 per- pan, which increased spending at keep competing for market share. If
cent over 2009. rates significantly below the aver- there is a note of caution in this year’s
The geographical distribution of age of 9.3 percent. North American data, it is an entirely justifiable one,
innovation spending tells an equally companies, however, which had cut given the all-too-gradual pace of re-
varied story. Every region increased R&D spending by almost 4 percent covery in some regional markets and
R&D spending in 2010, a significant in 2009, increased their spending in general uncertainty about the global
turnaround from the previous year, 2010 by more than 10 percent. economy, which calls into question
when the three regions that make Innovation spending by compa- whether this pace of R&D investment
up the lion’s share of innovators — nies headquartered in China and In- growth will continue in 2011.
North America, Europe, and Japan dia — and to a lesser extent those in — B.J., J.L., and R.H.
37
8
As for innovation culture, more than 41 percent of formers had an overlapping set of capabilities critical to
Need Seekers said theirs strongly supported their inno- success no matter which strategy they followed, those
vation strategy, compared with just 7 percent of Market top performers also had developed a unique, focused set
Readers and 14 percent of Tech Drivers. (See Exhibit 4, of capabilities essential to their strategy. In this year’s
page 9.) study, we viewed those strategic models through a dif-
These important distinctions were borne out in ferent lens: which strategic goals and cultural attributes
other ways as well. But the most notable was financial led to the greatest success within a given strategy, and
performance. Overall, Need Seekers were 30 percent how those goals and attributes contributed to the capa-
more likely to report their overall financial performance bilities needed to achieve that success.
as being superior to that of their peers than the other Thus, for instance, whereas companies following
two models, and, on average, they appear to have a any of the three strategic models have a common set
much better chance of outperforming the competition of strategic goals and cultural attributes, Need Seekers
than either of the other innovation models. ranked as their highest innovation goal the creation of
Our previous studies have consistently shown that “advantaged products and services,” and their num-
companies using any one of these strategies can regu- ber one cultural attribute as “openness to ideas from
larly outperform their peers, and that, although top per- external sources.” These characteristics clearly lead to

10. SUCCESSFUL TECH DRIVERS MUST
STRIKE THE PROPER BALANCE BETWEEN
THE PURE R&D THAT IN THE PAST LED
TO HIGH-TECH BREAKTHROUGH
INNOVATIONS, AND MORE MARKET-
ORIENTED ACTIVITIES.
Exhibit 4: Alignment by Strategy Model strategy has been the most frequently employed around
Companies following the Need Seeker model are more aligned the globe and across industries. And this year it contin-
than others, with 30 percent reporting high alignment of
ues to be the most common model among the world’s 10
features innovation
innovation and business strategy, and 41 percent saying their
culture strongly supports innovation.
largest spenders on innovation.
How Closely Is Your Innovation How Well Does Your Company Successful Tech Drivers can no longer depend solely
Strategy Aligned with Your Culture Support Your
Business Strategy? Innovation Strategy? on the ability of their researchers to develop ingenious
HIGHLY STRONGLY products that consumers are dying to have. Now, in or-
ALIGNED 8% 8% 7% 14% SUPPORTS
der to succeed, Tech Drivers must strike the proper bal-
30% 41%
ance between the pure R&D efforts that in the past led
34% 33% 31% 29% to high-tech breakthrough innovations, and the more
market-oriented activities of their less tech-centered
brethren. That’s why the most successful Tech Drivers,
like Google, have developed both the capabilities shared
51% 39% by all outperforming innovators, such as the ability to
35% 38% 34% 34% translate consumer and customer needs into product
development and engagement with customers, and the
capabilities specific to their own strategy: a deep un-
38
9
20% 17%
derstanding of emerging technologies and trends, and
15% 16% 21% 18%
NOT DOES NOT
the capacity to manage the life cycle of their products
7% 6%
ALIGNED 4% 3% 4% 4% SUPPORT
and projects.
NEED MARKET TECH NEED MARKET TECH
SEEKER READER DRIVER SEEKER READER DRIVER Few companies exemplify both the long history of
Note: Sums may not total 100 due to rounding. technology innovation and the new, more customer-cen-
Source: Booz & Company
tric demands better than Hewlett-Packard Company.
creating truly differentiated products by leveraging all Famed for its critical role in the founding of Silicon Val-
potential sources of good ideas. Each of the other two ley and its long history as a pioneer in a variety of tech-
models has its own corresponding distinct innovation nologies, HP has made a conscious effort to integrate its
goals and cultural attributes. (See Exhibit 5.) How do innovation efforts more tightly with the business, and to
those key goals and attributes aid and abet the efforts ensure that both its strategic goals and the innovation
of companies in each strategy to develop the capabilities culture that supports those goals are aligned with that
strategy+business issue 65
they need to succeed? overall strategy. And although the company’s overall
strategy may change as a result of the recent arrival of
Driving Technology Meg Whitman as chief executive officer, the tight link
Over the four years since we began our analysis of the with the innovation culture is likely to continue.
three models of innovation, the Technology Drivers The close alignment of innovation with the business

11. can be seen clearly at HP Labs, the company’s central agenda is very basic research looking 10 years into the
research organization. Prith Banerjee is HP’s senior vice future. Another third is tied to current products, so it
president of research and director of HP Labs, which looks maybe six to 18 months into the future. And the
has seven locations around the world. In this capacity, remaining third is in the middle — what we call applied
he both oversees the company’s researchers and works research — which looks two to five years into the future
with its five major business units — each of which has and is tied to some applications, but not products.”
its own R&D unit — to ensure the transfer of ideas and That is entirely in keeping with the strategic goals
innovations into products and services. “[The] mission of Tech Drivers: to ensure superior product performance
of HP Labs,” says Banerjee, “is fourfold. One is to cre- and quality, at the lowest cost possible. And it goes with-
ate absolutely breakthrough technologies. The second out saying that the entire effort must be imbued with a
one is around creating new business opportunities for stronger spirit of respect for technical talent and knowl-
HP. The third one is to advance the state of the art in edge, as well as openness to ideas from external sources,
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whatever we do. And the fourth one is to engage with including academic researchers from universities around
customers and partners.” the world. HP Labs makes a concerted effort to involve
To that end, says Banerjee, “We take a portfo- the company’s customers: It invites more than 500 cus-
lio approach within HP Labs: A third of our research tomers a year in to see what its researchers are working
Exhibit 5: Top Goals and Attributes by Strategy
All companies following any of the three innovation models share some of the most important innovation goals and cultural attributes.
Each model, however, also has distinct goals and attributes.
Top Innovation Goals
and Cultural Attributes MARKET READERS
Distinct innovation goal
• Products customized to local markets
and geographies
10
39
Distinct cultural attribute
• Culture of collaboration across functions
and geographies
NEED SEEKERS ALL THREE STRATEGIES
Distinct innovation goal Common innovation goals
• Advantaged products • Superior product performance
and services • Superior product quality
Distinct cultural attribute Common cultural attributes
• Openness to new ideas from • Strong identification with the customer and
customers, suppliers, overall orientation toward the customer experience
competitors, and other • Passion for and pride in the products
industries and services offered
TECHNOLOGY DRIVERS
Distinct innovation goal
• Developing low-cost products
Distinct cultural attribute
• Reverence and respect for
technical talent and knowledge
Source: Booz & Company

12. The 10 Exhibit F: The 10 Most Innovative 19 percent of respondents includ-
Companies ing them among the top three, re-
Most Innovative Innovation executives we surveyed again chose spectively. (See Exhibit F.) This year,
Apple as most innovative. Facebook edged onto
Facebook entered the list for the first
Companies the list at number 10.
time, suggesting the growing power
Company R&D Spending
of social media as a rich source of
T
2010 as % of Sales
his year, we again asked our $US Mil. Rank (intensity) innovation on the Internet. (Because
survey respondents to choose 1 Apple $1,782 70 2.7% Facebook is still private, however,
the companies they thought were the 2 Google $3,762 34 12.8% reliable financial data is not avail-
most innovative. And again, Apple Inc. 3 3M $1,434 86 5.4% able.) Altogether, the 10 most inno-
came out on top. Seventy percent of 4 GE $3,939 32 2.6% vative companies boasted signifi-
respondents named it one of the three 5 Microsoft $8,714 4 14.0% cantly better financial results over the
most innovative companies, and more 6 IBM $6,026 15 6.0% past five years than did the top 10
than half voted it number one — no 7 Samsung $7,873 7 5.9% spenders on R&D, especially when
surprise, given the company’s strong 8 P&G $1,950 61 2.5% results are considered in terms of
performance this year. The iPad con- 9 Toyota $8,546 6 3.9% earnings as a percentage of revenues.
tinues to define the market for tablet (See Exhibit G.)
features innovation
Not Not
10 Facebook reported n/a reported
computers, and Apple has been vying This year, we also looked at the
Source: Bloomberg data, Booz & Company
with the Exxon Mobil Corporation as innovation strategies followed by the
most valuable company in the U.S. by Chairman and CEO Steve Jobs. top innovators. The results are strik-
market capitalization — a testament Following Apple, again, were ing, especially in comparison with
to the innovative vision of the late Google and 3M, with 44 percent and the results of the top spenders. The
on, and works directly with some customers on “cus- world’s leading car manufacturers. Its business depends
tomer co-innovation” projects at the farthest reaches of heavily on working with its customers to determine ex-
its research vision. actly what they need and then building those products
This structure inevitably causes some tension with as cost-effectively as possible.
the business units — indeed, it’s designed that way. “We That puts Visteon squarely in the camp of the
are intentionally trying to create trouble for our business Market Readers, those companies that carefully moni-
units,” says Banerjee. “The businesses are looking in the tor markets and listen to their customers in order to
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40
short term for the next six months, next year. That’s gauge what the market is looking for, and then work
why a third of our activity involves assisting them with closely with suppliers and partners to provide it. As Tim
their current problems. But two-thirds of our activity is Yerdon, Visteon’s global director of innovation and de-
to create disruptive technologies.” Because the business sign, says, “Most people think about innovation as just
units continue to benefit from the short-term research, adding technology products. But it’s more than that.
and are involved through the lab’s advisory board in What we’re doing is taking a step back, looking at our
developing what Banerjee calls “the wacky, crazy industry, and asking ourselves, ‘How do we enhance
ideas,” they continue to support those ideas as potential life on board the car?’ A lot of the innovation involved
breakthroughs. in that is now being done in collaboration both with
our supply base and with our customers.”
Reading the Market This approach is in line with the innovation goals
The automotive supplier sector, hard hit by the recession we have identified among Market Readers, including
strategy+business issue 65
and the problems plaguing the auto industry in general, customizing products for markets and making sure
has only recently begun to recover. Among the compa- those products have a clear advantage in the market, in
nies at the center of the upswing is the Visteon Corpora- terms of both quality and cost. That, in turn, is sup-
tion, which produces a variety of systems, including cli- ported at top-performing Market Readers by a culture
mate electronics, interiors, and lighting solutions, for the that fosters collaboration across functions and geogra-

13. four most innovative companies, and Exhibit G: Top 10 Innovators vs. Exhibit H: Need Seekers in
six of the top 10, all follow the Need Top 10 R&D Spenders the Top 10
Seeker strategy (and Apple is the The top 10 innovators outperformed on all Companies following the Need Seeker model
three performance measures, especially on accounted for six of the top 10 innovators slots,
classic example). In comparison, only EBITDA as a percentage of revenues. but only two of the top 10 spenders.
two of the top 10 spenders are Need
Seekers. (See Exhibit H.) We rather Performance of Top 10 Innovators vs. Proportion of Strategy Models
Top 10 R&D Spenders Compared to Their
expected these results, given our Industry Peers in the Global Innovation 1000 Need Seekers
Others
findings that companies pursuing a HIGHEST
TOP 10 TOP 10
INNOVATORS
Need Seeker strategy have a greater POSSIBLE
SCORE: 100
R&D SPENDERS
likelihood of success, thanks to their 60% 20%
advantage at assembling the optimal 76
NORMALIZED
set of capabilities and creating the PERFORMANCE
OF INDUSTRY
PEERS: 50
culture needed to achieve superior 51 54 52
performance. 40 40
Source: Booz & Company
It is also worth noting that al- INNOVATORS
though six of the top 10 spenders are SPENDERS
pharmaceutical companies, not a
features title of the article
features innovation
LOWEST
POSSIBLE Revenue EBITDA Market Cap
single pharmaceutical company was
SCORE: 0
Growth
5-Yr. CAGR
as % of
Revenue,
Growth
5-Yr. CAGR
results show, as we have been say-
5-Yr. Avg.
voted onto the list of the most inno- ing for years now, that success in
vative. Indeed, only three companies Source: Booz & Company innovation isn’t about how much you
appear on both top 10 lists: Microsoft, spend, but rather how you spend it.
Toyota, and Samsung. Overall, the — B.J., J.L., and R.H.
phies, and openness to external ideas. Together, these pability now that the various systems that make up cars
goals and cultural elements help sustain the set of capa- have become so integrated.
bilities that enable these companies to succeed.
These capabilities include not just a willingness to Seeking Needs
pay attention to the market and work with customers As successful as many Market Readers and Technol-
but also to run a very tight product development ship, ogy Drivers are, there is something different about
using capabilities such as product platform and resource Need Seekers. It has to do with their strategy — work-
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41
requirement management. Says Yerdon, “In product ing closely with customers to develop products and get
development, we have a phase-gate process that goes them to market first. It has to do with their innovation
through four different gates to achieve what we feel is goals — ensuring that those products have a distinct ad-
an appropriate level of robustness in products and tech- vantage in the market. And the best Need Seekers have
nologies that are developed for sale to a customer. It’s put together a winning set of capabilities, including the
very highly governed and metricized.” judicious use of technology, a disciplined approach to
But it is the effort to instill a culture of collabora- product development, and the ability to generate deep
tion that has most transformed Visteon’s innovation insights directly from regular contact with end-users of
efforts. Behind all the company’s innovation efforts their product.
— whether they be concept prototypes or new climate But what really sets the best Need Seekers apart is
control systems — lies a big increase in the amount of their ability to execute on their strategy — to combine
collaboration that takes place, across functions, geogra- all these elements into a coherent whole. As we have
phies, and joint-venture partners. It used to be, says Yer- seen, the innovation strategy that Need Seekers follow
don, that groups would work in the same building and is significantly more aligned than either of the other
never talk to one another. But Visteon teams have been models, on average, and their culture is most likely to
working hard to change that aspect of their culture, in support their innovation efforts. Such companies are
part because collaboration has become a necessary ca- more profitable and boast higher enterprise value, and a

14. The Silicon ers is almost exactly the same as in
the overall population. And they are
Exhibit I: Strategy and Culture
in Silicon Valley
Valley Advantage almost three times as likely to say Silicon Valley companies are much more
likely to have strong strategic alignment and
by Barry Jaruzelski and their innovation strategies are tightly cultural support.
Matthew Le Merle aligned with their overall corporate
How Closely Is Your How Well Does Your
business strategies — 54 percent, Innovation Strategy Company Culture
compared with just 14 percent among Aligned with Your Support Your
S
Business Strategy? Innovation Strategy?
ilicon Valley is famous for its all companies. When asked whether
HIGHLY STRONGLY
long history of leadership in their corporate cultures supported ALIGNED
14%
SUPPORTS
19%
computing, semiconductors, soft- their strategies, 46 percent of Silicon
ware, biotech, and other innovation- Valley companies strongly agreed
46%
based industries. But beyond its tal- that they did, compared with only 19 54%
38%
ent base and access to capital, what percent of all companies, more than 32%
makes Silicon Valley unique? What double the general population. (See
exactly is the celebrated “West Coast Exhibit I.)
culture of innovation”? In conjunc- It may come as something of a 29%
21%
tion with this year’s Global Innovation surprise that Silicon Valley compa-
features innovation
30% 29%
1000, we worked with the Bay Area nies are no more likely to follow a
Council, a pro-business consortium Technology Driver innovation model 11% 11%
15%
of more than 275 companies in the than other companies are. But that, 14% 7%
NOT 14% DOES NOT
San Francisco Bay area, to identify in our view, only strengthens our ar- ALIGNED 3% SUPPORT 5% 7%
the strategic, cultural, and organiza- gument: Like many other top inno- ALL
COMPANIES BAY
ALL
COMPANIES BAY
AREA AREA
tional attributes that have led to the vators, Silicon Valley companies not COMPANIES COMPANIES
sustained success of this region. That only have found success in creating Note: Sums may not total 100 due to rounding.
included segmenting the survey re- pathbreaking new technologies, but Source: Booz & Company
sults we received from Silicon Valley are almost twice as likely as average value propositions that will win those
companies in hopes of better under- companies to have developed capa- customers’ business.
standing what cultural and organiza- bilities that provide a superior under-
tional elements make them different. standing of the stated and unstated Matthew Le Merle
Silicon Valley companies do in- needs of their end customers. It isn’t matthew.lemerle@booz.com
deed stand out. We determined that just about how many transistors you is a partner with Booz & Company
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42
they are almost twice as likely to fol- can fit on a chip, but also about how based in San Francisco. He works
low a Need Seeker innovation model, such advances can lead to products with leading technology, media, and
compared to the general population and services that gain unprecedented consumer companies, focusing on
of companies in our global survey traction in the marketplace through strategy, corporate development,
— 46 percent versus 28 percent — superior insight into customers, as marketing and sales, organization,
whereas the proportion of Tech Driv- well as the development of practical operations, and innovation.
disproportionate number of these highly aligned com- as the function with the most influence in their com-
panies are following the Need Seeker model. pany’s power structure. And Need Seekers even outper-
Need Seekers are different in other ways as well. formed in terms of the management of the innovation
Our study shows that significantly more of the techni- process: They rated their portfolio management pro-
strategy+business issue 65
cal leads at companies classified as Need Seekers report cesses highest for both consistency and rigor.
directly to the CEO, and that their innovation agendas The advantage of the Need Seeker model is evident
are much more likely to be developed and clearly com- when the biggest R&D spenders are compared with
municated from the top down. In the survey, they were the most innovative companies. Just two of the top 10
nearly twice as likely to point to product development spenders are Need Seekers, whereas six of the 10 most

15. ALTHOUGH THEIR INNOVATION STRATEGIES
MAY DIFFER, COMPANIES LIKE AGILENT,
HP, AND VISTEON UNDERSTAND WHAT IT
TAKES TO EXCEL AT DEVELOPING
NEW PRODUCTS THAT WILL
SUCCEED IN THE MARKET.
innovative are: Apple, Facebook, 3M, GE, IBM, and is evident in how the company gathers insights from
Procter & Gamble. (See “The 10 Most Innovative customers and outside innovators alike. Researchers at
Companies,” page 11.) Moreover, Silicon Valley com- the lab reach out regularly not just to academics, but
features title of the article
features innovation
panies are often viewed as Technology Drivers, but in also to customers like government labs, to help acquire
fact almost half of the companies we surveyed that hail a better understanding of the future of technology and
from the Bay Area are actually Need Seekers. (See “The its customers’ needs. Meanwhile, capturing insights on
Silicon Valley Advantage,” page 13.) what customers need now is the responsibility of not
Agilent Technologies Inc. is one of those Silicon just business unit researchers but all customer-facing
Valley Need Seekers. Formed as a spin-off from HP in employees.
1999, the company concentrates on instrumentation When asked what holds all this activity together,
and measurement solutions for the communications, Solomon turns the discussion to culture. “There’s a
electronics, life sciences, and chemical industries. CTO very strong innovation culture throughout the com-
Darlene Solomon puts the distinction this way: “Agi- pany, and a culture of teamwork. Agilent really encour-
lent definitely has the technology focus in our roots, ages that. Innovation is not just R&D in Agilent,” she
and we want to continue to be a technology leader, not says. “We’ve really tried to make clear that it’s about ev-
a follower. But to succeed, you need to be balanced in erybody questioning the status quo and looking to do
terms of focusing on the customer and understanding something better than what’s been done before. Each
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43
the market. There is a lot of great technology we can year, we recognize and reward innovation through the
work on, and no shortage of technical challenges. But Agilent Innovates program, with innovation categories
we need to choose the areas where, if we make a contri- ranging from customer satisfaction to employee- and
bution, the customer and business value that can result market-centered contributions.”
is clear.” In many ways, Agilent’s innovation culture stems
The trick for Agilent, as for many other compa- from its history as part of HP, but Solomon notes that
nies, is to balance short-term R&D with long-term the company has defined its own values. Now, she says,
thinking about the kinds of things that will need to “the cultural areas we’ve really tried to strengthen are
be measured in five or 10 years. Says Solomon: “It’s re- speed to opportunity, customer focus, and accountabil-
ally about making sure that we’re at the leading edge ity. Innovation itself has always been a strength; but to
of where our customers are going in the near term, and really address customer needs more swiftly and to focus
more than 90 percent of that work takes place in the on the things that matter most are where the culture of
businesses. In Agilent’s research laboratories, we have this company is today.”
to make sure that we are placing the right bets now so
that we have the right technologies in the future, at the The Cultural Imperative
right time, when they’re needed.” Although their innovation strategies, and their rela-
This is a balancing act at which Agilent excels. It tive performance, may differ, companies like Agilent,

16. THE MOST SUCCESSFUL INNOVATORS
ENSURE THAT THEIR CULTURE NOT ONLY
SUPPORTS INNOVATION, BUT ACTUALLY
ACCELERATES ITS EXECUTION.
Booz & Company Global Innovation 1000: Methodology
As has been the case in the past nine industry sectors (or “other”) Each company was classified
features innovation
six editions of the Global Innova- according to Bloomberg’s indus- into one of our three innovation
tion 1000, this year Booz & Com- try designations, and into one of strategy models — Need Seeker,
pany identified the 1,000 public five regional designations, as de- Market Reader, or Technology
companies around the world that termined by their reported head- Driver — based on survey respon-
spent the most on research and quarters locations. dents’ answers to four profiling
development in 2010. To be includ- To enable meaningful com- questions. We then asked respon-
ed, a company’s data on its R&D parisons within industries, we dents to rank their company’s
spending had to be public; all data indexed the R&D spending levels most important innovation goals,
is based on the most recent fis- and financial performance met- cultural attributes, and organiza-
cal year, as of June 30, 2011. Sub- rics of each company against the tional factors, as well as their per-
sidiaries that were more than 50 median values in its industry. ception of their company’s perfor-
percent owned by a single corpo- Global expenditures on research mance on each. We analyzed their
rate parent were excluded if their and development were estimated responses using a variety of sta-
financial results were included in using data from the World Bank, tistical methods that allowed us to
the parent company’s reporting. the Organisation for Economic Co- distinguish the cultural and orga-
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For each of the top 1,000 com- operation and Development, the nizational attributes most preva-
panies, we obtained the key fi- International Monetary Fund, and lent among companies, depending
nancial metrics for 2001 through government research reports. on which of the three innovation
2010, including sales, gross profit, To understand how innovation strategy models they followed.
operating profit, net profit, histori- strategy, culture, and organization Company names and responses
cal R&D expenditures, and market affect performance, we conducted were kept confidential (unless
capitalization. All sales in for- a Web-based survey of nearly 600 permission to use them was ex-
eign currencies and R&D expen- senior managers and R&D pro- plicitly granted), but respondents
diture figures prior to 2010 were fessionals from more than 400 were asked to identify themselves
translated into U.S. dollars ac- companies around the globe. The to allow the association of survey
cording to the average exchange companies participating repre- answers with financial metrics.
rate in 2010. In addition, figures sented more than US$182 billion We then conducted interviews with
strategy+business issue 65
for total shareholder return were in R&D spending, or one-third of a subset of respondents, in order
gathered and adjusted to reflect the Global Innovation 1000’s total to gain a deeper understanding of
each company’s total sharehold- R&D spending for 2010, all nine of the links among strategy, culture,
er return in its local market. All the industry sectors, and all five and organization.
companies were coded into one of geographic regions.