How innovative are Forbes' "Most Innovative Companies?"

Some not so much, argues guest-blogger and SUP author of ENDURING SUCCESS: What We Can Learn from the History of Outstanding Corporations Christian Stadler, in a post written originally for his own blog, Enduring Success: 

 With the entire craze about innovation it was only a matter of time before we get a list of the world’s most innovative companies. Forbes published one based on a new book by Jeffrey Dyer, Hal Gregersen, and Clayton Christensen. Considering the stature of the three I would have expected a ‘solid’ ranking. By that I mean a ranking based on a method that really captures innovation. Unfortunately that is not the case.

Forbes’ innovation premium is calculated by comparing the Net Present Values of Cash flows (i.e. value of existing business) with the market capitalisation. The assumption is that investors bid up the stock value if they expect future innovation results. For two reasons this does not work. First, investors do not necessarily know what innovations companies work on. Often firms keep this secret to avoid competitors from copying their ideas. Second, investors bid up stocks for many reasons not related to innovation such as brand value, future competition, or economic environment. For example the market cap of an oil firm is going up when investors expect a crisis in the Middle East. For those oil companies having large reserves in politically safe countries the stock price is going to sore even more.

So how does Forbes’ list hold up when using other measures of innovation? Not very well! The most widely used measurement is patents. I ranked Forbes’ ‘Most Innovative Companies’ according to the number of patents they published in 2011 so far. The ranking is fundamentally different (for those into statistics, the correlation is -0.1285). Not much changes if I weigh the patents according to company size (correlation is -0.2043).

Patents are not an ideal measurement either as some innovations are difficult to patent (e.g. process innovation). This means that some industries patent much more than others. But even within a particular industry the Forbes ranking turns out to be flawed. Take Henkel, Procter & Gamble, and Unilever. According to the Forbes list, P&G is much more innovative than Unilever and Henkel comes last. Looking at patents P&G is still better than the other two but they are much closer together and Henkel has more patents than Unilever.

While alternative measures of innovation such as the number of new products introduced or patent citations (i.e. how often a patent is cited) might not produce exactly the same results, my crude patent count shows that Forbes’ list simply does not work. This does not undermine the book of Dyer and his colleagues as the companies on the list are probably all pretty innovative, but calling Salesforce.com the world’s most innovative company is a bit of a stretch.

		Number of patents in 2011	Forbes' ranking
1	Toshiba	3610	94
2	Qualcomm	3586	61
3	Microsoft	1877	86
4	ABB	967	93
5	Procter & Gamble	964	24
6	Apple	888	5
7	L'Oréal	836	26
8	Henkel	744	83
9	Corning	716	69
10	Schlumberger	670	27
11	Boston Scientific	578	91
12	Daikin Industries	532	70
13	Google	475	7
14	Unilever NV	465	74
15	Alstom	463	29
16	Rolls-Royce Holdings	439	76
17	Kao	438	66
18	Syngenta	428	79
19	Halliburton	426	97
20	Air Liquide	393	90
21	Alcon**	372	21
22	Oracle	358	77
23	BAE Systems	350	96
24	Johnson Controls	314	73
25	Colgate-Palmolive	294	33
26	Areva	268	37
27	SAP	256	63
28	Juniper Networks	207	42
29	Monsanto	205	10
30	Terumo	204	14
31	Sandvik	200	58
32	Fresenius SE	194	78
33	Kraft Foods	187	82
34	Essilor International	185	25
35	Synthes	170	41
36	HTC Corp	167	56
37	Fresenius Medical Care	145	51
38	Air Products & Chemicals	140	60
39	Nidec	138	13
40	Adobe Systems	136	54
41	Kone	135	39
42	Altera	132	99
43	Atlas Copco	130	67
44	Automatic Data Processing	124	87
45	Reckitt Benckiser Group	123	11
46	Ecolab	123	28
47	Stryker	108	95
48	Cameron International	107	85
49	LeGrand	106	80
50	Amazon.com	104	2
51	Nintendo	103	20
52	Beiersdorf	88	23
53	NetApp	87	34
54	Hindustan Unilever	86	6
55	Intuitive surgical	84	3
56	Rockwell Automation	78	38
57	Praxair	71	43
58	Fanuc	70	45
59	Celgene	58	12
60	Agilent Technologies	58	55
61	Intuit	58	84
62	Emerson Electric	55	64
63	Citrix Systems	53	36
64	Tencent Holdings	50	4
65	Sany Heavy Industry	47	72
66	Avon Products	46	47
67	SMC Corp	43	49
68	CSL	42	32
69	Hershey	37	46
70	Danone	35	35
71	General Mills	32	31
72	Thermo Fisher Scientific	30	71
73	Natura Cosméticos	23	8
74	Infosys	23	15
75	Richemont (Compagnie Financière)	23	62
76	ASML Holding	21	59
77	ConAgra Foods	19	100
78	Keyence	18	17
79	Salesforce.com	17	1
80	FMC Technologies	15	18
81	Secom	13	52
82	Kellogg	13	57
83	Tenaris	13	92
84	Paccar	12	48
85	Anheuser-Busch InBev	9	53
86	Danaher	7	68
87	Starbucks	6	19
88	Schindler Holding	2	81
89	Campbell Soup	1	65
90	Zoomlion Heavy Industry	1	75
91	Activision Blizzard	0	22
91	Bharat Heavy Electricals	0	9
91	CA	0	98
91	China Oilfield Services	0	40
91	Estée Lauder Cos	0	44
91	ICL-Israel Chemicals	0	30
91	Maroc Telecom	0	88
91	PepsiCo	0	50
91	Pernod Ricard	0	16
91	Precision Castparts	0	89

 

Comments

[Heath]

And a big key point. IBM has more patents than anyone and doesn't even make the list? Really?

[eleanor clay]

--interesting insight! patents sound like a more reliable measure of innovation as opposed to NPV and market capitalization.
*great article!