Each year BusinessWeek magazine publishes a list of companies considered to be the world’s most innovative. This year’s list was recently published [The 50 Most Innovative Companies, by Michael Arndt and Bruce Einhorn, Bloomberg BusinessWeek, 15 April 2010]. The list is important because it’s not just a list generated by the magazine’s editorial staff sitting around a table nominating companies they know. Here’s a description of the process that’s used:

“Bloomberg BusinessWeek’s Most Innovative Companies special report is based on data from longtime partner Boston Consulting Group (BCG). Last December the consultancy e-mailed a 21-question poll to senior executives around the globe. The 1,590 respondents, who answered anonymously, were asked to name the most innovative companies from outside their own industry in 2009. BCG then factored in the financial performance of the top vote-getters. The final list weights the survey results 80%, stock returns 10%, and three-year revenue and margin growth 5% each. For the 2010 report, BCG changed the survey’s distribution so that responses better reflected each country’s share in the world economy. That meant fewer questionnaires to India, Italy, Spain, and the U.S. and more to Germany, Japan, and other countries in Asia. To improve the response rate, BCG also translated the poll into Japanese and Chinese. BCG found that the recalibrated sample may have altered the rankings of individual companies by a few places, but it did not account for the tilt away from the U.S. and toward the rest of the world. Performance and reputation did.”

In other words, this isn’t like the BCS system in college football that ensures the national championship is always won by teams from major conferences. This is like holding the World Series and actually inviting the world to participate. Arndt and Einhorn report that the list adds to Western concerns that the center of gravity of the world’s economy is shifting east.

“In the past decade, as the U.S. was losing an estimated 2.4 million factory jobs to China, the Economic Policy Institute and other research organizations identified an alarming trend—alarming to Westerners, at least. The factories of South Korea, Taiwan, and China were making their way up the global value chain, from the sneakers, toys, and T-shirts they had produced in earlier years to personal computers, consumer electronics gear, household appliances, and even cars. For the West, the silver lining was this: Asia’s high-tech products were still generally regarded as inferior knockoffs of items designed in the U.S. and other so-called knowledge economies. China may have been the biggest worry, but as author Ted C. Fishman argued in his 2005 book, China, Inc., it possessed a factory culture—it could imitate but not innovate.”

Arndt and Einhorn indicate that such assessments should provide only cold comfort to Western firms. The fear has been that “if Asia ever did figure out how to design cutting-edge products comparable to those dreamed up in the West, … the one-two punch of high-value research and development and low-cost manufacturing would make it almost unbeatable in the battle for global economic supremacy.” Those fears, they claim, are beginning to materialize.

“The battle is on. In the 2010 Bloomberg BusinessWeek annual rankings of Most Innovative Companies, 15 of the Top 50 are Asian—up from just five in 2006. In fact, for the first time since the rankings began in 2005, the majority of corporations in the Top 25 are based outside the U.S. Asia’s newfound confidence is turning up everywhere you look, from wind turbines to high-speed bullet trains, just two of the technologies China is trying to export to the U.S.”

Americans can take some comfort from the fact that the top companies on list, Apple, Google, Microsoft, and IBM, are U.S. firms. Rapidly ascending on the list are companies from South Korea LG Electronics (7), Samsung (11), and Hyundai Motors (22) and companies from China. Arndt and Einhorn continue:

“The extended Top 50 list is dominated by companies from Europe, Asia, and, in another first, South America (Petrobrás of Brazil at No. 41). China’s rise is biggest. A year ago its only representative was PC-maker Lenovo Group, at 46. This year Greater China is tied with Asia’s postwar powerhouse, Japan, thanks to showings by BYD [8], Haier Electronics (27), Lenovo (29), China Mobile (44), and Taiwan-based HTC (47). The age of Asian innovation has begun.”

On a list with a fixed number of spots, newcomers to that list must displace a company already on the list. “To make room for these newcomers to the Top 25,” Arndt and Einhorn report, “which also include Intel and Ford Motor from the U.S. and Virgin Group from Britain, past winners Honda Motor, Reliance Industries, McDonald’s, Walt Disney, and Vodafone all got pushed to lower slots on the Top 50, while AT&T dropped off entirely.” Coming out of the Great Recession, Arndt and Einhorn wonder whether this list represents a watershed in global innovation. They continue:

“The Chinese government is also trying to encourage more companies to be innovators. Beijing has implemented new procurement policies to promote what it calls ‘indigenous innovation’ by requiring locally made technology in certain government purchases. U.S. and other foreign companies have cried foul, alleging that China’s new rules favoring locals amount to trade barriers in sectors from environmental technology to telecom. China’s indigenous initiative isn’t the main driver of innovation there, according to Boston Consulting’s annual survey of top executives, which provides the raw data for our list. The survey suggests the crucial factor is a mindset—a belief that innovation matters. In China, 95% of executives said innovation was the key to economic growth, while 90% and 89% of respondents in South America and India, respectively, agreed. In the U.S., only 72% said innovation was important. Similarly, 88% of executives in China said they were raising their innovation budgets this year, followed by 82% in South America and 73% in India. The rate fell to 48% in the U.S., ahead of only Japan, where just 34% of executives said their companies planned to increase innovation spending. All of which suggests the U.S. may not be dominating the list again soon.”

Not everyone believes that Asia should be coronated king of innovation — at least, not yet. Arndt and Einhorn explain:

“As specific Asian companies charge ahead in the global ranking, many analysts and executives complain that overall, businesses in China, Korea, and India aren’t all that innovative. Their domestic economies are growing so quickly—and there are so many opportunities to launch tried-and-true business models—that these companies don’t need to come up with the Next Big Thing. Sticking with the Same Old Thing suits many companies and investors just fine. ‘You need something revolutionary to come along in the U.S. to really make an outsize return,’ says William Bao Bean, a Shanghai-based partner with Softbank China & India Holdings, a $105 million venture fund backed by Cisco Systems and Softbank. In Asia’s big two countries, ‘you don’t need to make a revolution,’ he says. ‘There’s low-hanging fruit to be had.’ For many companies, though, relying on the easy pickings in China and Taiwan is no longer an option. … An innovation-driven skirmish between Chinese and Taiwanese players [is] something that simply didn’t happen a decade ago.”

Here’s the list of the Top 25 innovative companies:

1 Apple (U.S./North America)
2 Google (U.S./North America)
3 Microsoft (U.S./North America)
4 IBM (U.S./North America)
5 Toyota Motor (Japan/Asia)
6 Amazon.com (U.S./North America)
7 LG Electronics (South Korea/Asia)
8 BYD (China/Asia)
9 General Electric (U.S./North America)
10 Sony (Japan/Asia)
11 Samsung Electronics (South Korea/Asia)
12 Intel (U.S./North America)
13 Ford Motor (U.S./North America)
14 Research In Motion (Canada/North America)
15 Volkswagen (Germany/Europe)
16 Hewlett-Packard (U.S./North America)
17 Tata Group (India/Asia)
18 BMW (Germany/Europe)
19 Coca-Cola (U.S./North America)
20 Nintendo (Japan/Asia)
21 Wal-Mart Stores (U.S./North America)
22 Hyundai Motor (South Korea/Asia)
23 Nokia (Finland/Europe)
24 Virgin Group (Britain/Europe)
25 Procter & Gamble (U.S./North America)

As that list demonstrates, in order to make the list a company has to have been around long enough and be big enough to have an international reputation. I suspect that some of the most innovative companies in the world are just getting their legs under them. A decade or two from now, this list could change considerably. There are, for example, no biotechnology or nanotechnology companies on the current list. In a globalized world, innovation benefits everyone. I actually look forward to the day when the first African company makes the list. That’s when we’ll now that the world has truly transformed.

For companies with aspirations to be named to the BusinessWeek list, Mike Gordon, Chris Musso, Eric Rebentisch, and Nisheeth Gupta have some suggestions [“The Path to Developing Successful New Products,” Wall Street Journal, 30 November 2009]. Mr. Gordon and Mr. Musso both work with McKinsey & Co. The former is an engagement manager and the latter is an associate principal. Dr. Rebentisch is a research associate at the Massachusetts Institute of Technology and Mr. Gupta is a graduate student in the MIT system design and management program. Here’s what they recommend “after surveying more than 300 employees at 28 companies across North America and Europe.”

“Businesses with the best product-development track records do three things better than their less-successful peers: They create a clear sense of project goals early on, they nurture a strong project culture in their workplace, and they maintain close contact with customers throughout a project’s duration. The teams in our study that embraced these tactics were 17 times as likely as the laggards to have projects come in on time, five times as likely to be on budget, and twice as likely to meet their company’s return-on-investment targets. While we focused on companies in the automotive, high-tech and medical-device industries, we believe that product makers of all stripes could benefit from our work.”

Let’s examine each of their recommendations separately; beginning with creating a clear sense of project goals.

“Whenever project requirements were clearly defined and communicated to teams before kickoff, the project had a greater chance of success. In our survey, 70% of the people working on high-performing projects—those that ranked in the top quarter of a performance index linking best practices to outcomes—said they had a clear view of the project’s scope from the beginning, compared with just one-third of poor performers. We found that not thinking through a project’s scope early on—say an appliance maker asks developers to design a new cooking range in the four-burner category but then later expands the project to include ranges with six burners—can create delays. The teams with a clear understanding of project requirements appeared better able to make trade-offs between product performance and things like cost, time to market and project risk. Only 19% of poor performers said they had the necessary information to make those decisions. Top performers also focused more intensely than low performers on staffing projects with the right people: 47% of the former researched employees’ skill sets before the project kicked off to ensure the project team was well-rounded. None of the low performers did.”

Sir Francis Bacon, Viscount St. Alban, is famous for writing, “knowledge is power.” What he actually wrote in his 1597 essay entitled Meditationes Sacraes was “For also knowledge itself is power”; but, the more common aphorism is a bit more catchy. Gordon and his colleagues capture this truth in their first recommendation; although they call it “a clear understanding of project requirements.” Without knowledge, trade-offs cannot be intelligently made. I was a bit surprised that they included team selection in a recommendation about focus. I would have made team selection a separate topic of discussion because of its importance. I have repeatedly noted that teams made up of people from different areas of expertise are much more likely to come up with innovative solutions to problems than teams whose members share a common background. I think that is what Gordon et. al mean when they write that a project team must be well-rounded. Their next recommendation is that companies should foster a culture that supports project success. They write:

“The top-performing companies in our survey … nurtured a strong project culture by making product development a priority. They made more of an effort than the laggards—39% versus 12%—to minimize staffing disruptions due to external demands and to staff projects adequately. When people with critical skills become overburdened, they often decide on their own which of their many projects is the most important, a decision best made at the management level. Two-thirds of top performers compared with 39% of poor performers said team members focused more on the success of the project than on satisfying the needs of their job function when those interests competed. They also were more likely than the laggards—44% versus 17%—to give team leaders responsibility for reviewing team members’ job performances. Three years ago, a North American medical-device maker in our study began an effort to stem market-share losses. Recognizing that one of the company’s underlying problems was that project culture was weak, the device maker gave senior team leaders ownership of projects from beginning to end, as well as authority over staffing, personnel reviews and, in some cases, profit-and-loss responsibility. The new structure encouraged leaders to make better decisions, resolve conflicts quickly and reduce delays.”

I’m a little ambivalent about this recommendation. The authors seem to ignore the fact that truly innovative companies foster an environment where failure is tolerated because they know that failure is the inevitable companion of innovation and eventual success. One of the conclusions of the BusinessWeek staff was that truly innovative companies financially outperformed their less innovative competitors. Fostering a culture that rewards success and doesn’t tolerate failure may allow a company to survive, but it won’t permit it to thrive. Their next recommendation is for companies to listen to their customers.

“The successful innovators in our study kept in close contact with customers throughout the development process. More than 80% of the top performers said they periodically tested and validated customer preferences during the development process, compared with just 43% of bottom performers. They were also twice as likely as the laggards to research what, exactly, customers wanted. That made them better able to identify and fix design concerns early on, minimizing project delays. The medical-device maker we mentioned created a matrix to identify and weigh the importance of various product features to different customer segments. It then tested trade-offs between product performance and things like price by bringing in surgeons and other medical specialists to use the product in simulated clinical settings. That allowed the team to fine-tune the product well before launch. The result? Three years after starting its effort to shore up market share, employee satisfaction with product development increased, time to market improved for all projects—up to 40% in some cases— and overall gross margin rose six percentage points.”

My only caveat here is drawn from the work of Harvard professor Clayton Christensen who has argued that “listening to customers” can result in a company getting blindsided. In his best seller The Innovator’s Dilemma, Christensen noted that customers will tell you they want what you are selling right up until the moment that something better (or good enough and cheaper) comes along. Having said that, I agree with Gordon and company that getting customers involved early in the design stage is a good idea. Sometimes designers really don’t know how a product is used until they watch someone use it. It’s always interesting to read what researchers find out about innovative companies. But even being able to identify what makes them more innovative than their competitors doesn’t mean that their competitors will be able to close the innovation easily. Innovation isn’t easy. A lot of things need to go right and come together. Gordon, Musso, Rebentisch, and Gupta come closest to identifying what really sets companies apart when they discuss people and culture. Put the right people in the right environment and good things normally result.