Are Innovative Companies More Profitable?

By at least one measure, the answer is yes.

Dylan Minor, Paul Brook, and Josh Bernoff Reading Time: 7 min 

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Does a commitment to corporate innovation actually pay off? If so, how could you prove it?

We recently researched this question across five years of data from 154 companies. Because these companies all used the same ideation management software, we were able to seek correlations between their commitment to innovation and their public financial results, such as growth and profit. (The data about individual participants at each company and about the companies themselves remains private; this study analyzed only public financial information and anonymized company metadata.)

The companies in this study all used a platform that enables employees to share ideas in response to challenges created by management, or comment or vote on ideas shared by others. As we demonstrated in our previous research, the key variable that predicts successful innovation across these companies is ideation rate: the number of winning ideas generated per 1,000 active users. In this context, winning ideas means employee-generated ideas that were finally selected by management for active development and implementation.

We examined the relationship between ideation rate and several publicly reported financial metrics (based on generally accepted accounting principles [GAAP]) for the 28 public companies in our data set for the time period between 2014 and 2016. We found a significant correlation between the ideation rate at these companies and growth in profit or net income: The more ideation, the faster they grew. (See “Profit Growth Is Correlated With More Accepted Ideas.”) While the correlation is far from perfect, this clearly is not a random effect; you’d expect to see a correlation this strong by random chance less than one time in 100.

Each data point here is a fascinating case study. For example, the enterprise with the highest ideation rate was a large health care company in which a highly active ideation program generated 500 winning ideas per 1,000 active users — and where the net profit grew 6% over the two years we studied. And the company in the sample with the fastest-growing profit, a semiconductor company, was generating a healthy 340 winning ideas per 1,000 active users.

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About the Authors

Dylan Minor holds an assistant professorship at the Kellogg School of Management. Paul Brook (@spigit) is the chief customer officer at Spigit, the largest provider of ideation management software. Josh Bernoff (@jbernoff) is the author of Writing Without Bullshit: Boost Your Career by Saying What You Mean and the coauthor of three business strategy books, including the best seller Groundswell.

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Comments (2)
Bradley Pallister
Innovation requires collaboration, ideation, execution and value creation.

Teamwork is essential to getting things done. In today's global and digital 24/7 world, challenges are more complex; it's becoming increasingly important to bring more, diverse minds to the table and to break down silos.  The technology is available now that you don't need to be physically together to get some extraordinary results.

Fresh, new ideas help your business stand out. With the ever-increasing intensity of competition for resources, busineses must differentiate in order to survive.

What good are new ideas if they are not put to use? Businesses must engage the best people to champion their ideas and keep those great ideas moving forward.  Ideas are worth zero without execution.

You don't have innovation if your new ideas aren't creating value (to back up @Kheepe Moremi's comment). Businesses must implement ideas and programs identified as most effective in delivering value to your stakeholders.
Kheepe Moremi
Innovation is a key driver of value creation, at least in my experience. It is a key driver of revenue growth, operational efficiency and capital efficiency. Innovation that is weaved into the DNA of how a firm does business is even better as it enables the firm to innovate repeatedly.

It would be interesting though, to see three things in your future research endeavours; 1) percentage of ideas generated that get successfully commercialised; 2) operating performance improvement over a longer time period, 5 years and; 3) the type of innovations that drive operating performance improvement.