The giant Wealth Management firm UBS AG just (November 2010) published a report outlining the financial market perceptions of companies that invest in innovation. The general conclusion is that the stock price of companies in certain sectors is punished for “over” investment in innovation. The contrary is also pointed out that companies that “under” invest” in innovation should be viewed with some scepticism as the market expects competitive levels of investment. Companies that try to manage cash flow by under investing in key areas like innovation are punished.
The article goes on to point out that there are three general areas of innovation: (i) product, (ii) process and (iii) distribution. The level of risk varies for each type of innovation but product innovation carries the most risk because it requires the most investment. Small start-up companies are a good example of product innovation.
Two key industry sectors were rewarded for higher levels of innovation: Healthcare and IT. This is because their very survival depends on being able to drive business growth with new products. Think of how often and how much is invested in new drug therapy by the big companies like J&J, Merck Frost and Eli Lilly. If they didn’t invest heavily in new product development they wouldn’t be around long.
The bottom line is that innovation is a must for any/every company. The level of investment and attention it gets is another matter. This will depend on competitive dynamics, financial performance and investor risk tolerance. As a general rule of thumb, if you’re not driving 15-20% of your annual revenue from new products/services you’re probably not paying enough attention to innovation.