Measuring the Culture of Innovation

“When it comes to innovation, geography is destiny,” wrote the New York Times this past February. Not according to three business school professors, who say it’s corporate culture, not geography, that defines innovative potential.

A February 2007 working paper, Innovation in Companies Across Nations: New Metrics and Drivers For Radical Innovation, describes a global research effort that looked at 759 public companies from 17 of the largest economies and most populous countries in the world. The companies came from a set of nations that included developed nations such as the United States, Germany and Japan, and developing nations such as China and India, providing a cross-cultural look at the factors that drive innovation.

Measuring innovation can be a tricky business, however. Other research tends to focus on laboratory inputs, such as the number of scientists or research and development spending, or intermediate outputs, such as patents, as proxies for innovation. However, this paper defines radical innovation as “the commercialization of new products that are based on substantially different technology and provide substantially higher customer benefits relative to existing products in the market.” To capture the commercialization aspect, a more direct measure of innovative output would be needed, surmised the authors, Gerard J. Tellis, professor of marketing, Neely Chair of American Enterprise and director of the Center for Global Innovation at USC’s Marshall School of Business; Jaideep C. Prabhu, professor of marketing at the Tanaka Business School, Imperial College London; and Rajesh K. Chandy, professor of marketing at the University of Minnesota’s Carlson School of Management.

So the professors surveyed vice presidents for innovation or technology at their sample companies to determine how radically different the executives felt their companies’ products are from the competition’s, and whether they believed their companies lag behind others in introducing products based on new technologies. This survey data was then combined with data on company patenting and national data covering a host of factors that are considered to drive innovation.

It turns out the proxies that other researchers have used — patenting, for example — are not strong factors for stimulating radical innovation. Neither are most of the factors that other researchers have posited at the national level, such as religion, geography and intellectual property protections.

Rather, the most important factor driving innovation is the internal culture of the company. Specifically, the researchers found that a future market orientation, a willingness to cannibalize and a tolerance for risk are three cultural elements that have a particularly strong relationship with radical innovation. Organizational tools such as incentives and product champions are also important, though less so. The only other factor that the authors found to be significant is R&D spending, but even that is not as strong as company culture.

Not even a nation’s intellectual property protections are that important for innovation at the company level. “If you think about it, India and China are very low on intellectual property but they are highly innovative right now,” explains Tellis. “China is coming out with new cars that are half the price of foreign brands and are comparable, at least in looks, if not in performance and long-term reliability. And India is producing drugs, right now generics, by employing an entirely new process that involves innovation.”

Since radical innovation implies commercialization, according to the authors’ definition, an important product must reach the market before a technology can be called radical. And commercialization should lead to financial performance, which the study also confirmed. “In general, what we found,” says Tellis, “is that the more radical innovation you have, the higher is your market-to-book ratio.”

This is an early look at a broader global research effort on innovation. “There are a lot of different ways to organize. Some companies organize in a monolithic way, they open subsidiaries and they are all one solid culture. Some are highly decentralized, [wherein] everything is autonomous and each can have its own culture. We’re going to see which structure, format and culture works the best.”

In addition, this study only covered manufacturing companies’ innovations; other studies are forthcoming for services industries, Tellis says. And, importantly, the researchers are working to convert their metric for innovation from a survey-based instrument to a broader measure backed by news reports and searches of public databases.

For more information, contact Gerard J. Tellis at tellis@.usc.edu, Jaideep C. Prabhu at j.prabhu@imperial.ac.uk or Rajesh K. Chandy at rchandy@csom.umn.edu.