Innovation Planning in Turbulent Times

As many of us are wrapping up our 2012 budgeting and planning process, one thing continues to worry even the most seasoned senior executives: Market Volatility. Twenty-eleven has been a year in which volatility reached historic levels, and one in which even the most experienced of global investors increasingly worried about risk as the year progressed. In this kind of market even the best spiked egg nog may have difficulty calming the fears of the investment community.

Innovation executives can’t help but worry about how the broader investment climate will affect their 2012 innovation plans (see chart 1). Such volatility sometimes means exasperation for innovation officers and their staffs as they try to maintain their budgets and portfolios amidst buffeting from completely external forces. (How many of us have kept a close eye on the dynamics of the sovereign debt markets?) This challenge confronts even the most talented teams.

Chart 1: Percentage of institutional investors who consider a decline in equity markets a risk Source: Allianz Global Investors RiskMonitor Report

Fortunately, with the benefit of hindsight we now know how the most successful companies weathered the storms of the Great Recession. The seven companies below (see table 1) had to be smart about the bets they were making, but each of them continued to bet big on innovation overall and saw the market reward them handsomely.

The first column in the table below indicates the companies’ market capitalizations in August 2011. This is how much the stock market values the company based on its current product portfolio, expected innovations, and cost control. The second column indicates its rank in market capitalization. The column in blue indicates how many spots each company has moved up in rank since the Great Recession.

While on average each of these companies has moved up six spots in valuation rank, three of the seven moved up a whopping nine spots. While all of these companies are now among the 20 most valuable companies in the US, two of them were not in the top 20 before the Great Recession. While the S&P 500 has returned an annual average of -4.2% to the market since June 2008, these companies have averaged a 15% annual return. These companies saw market tumult as an opportunity to double down on their savviest innovations and the market paid handsomely for that.

Table 1: How shareholders have rewarded companies for investing in innovation during the great recession

This short table confirms what most innovation officers already know in their hearts: That while turbulent times may require smart pruning, the savviest companies —and the most handsomely rewarded —are those that continue to introduce innovative ways of satisfying customer needs. (Even those needs customers don’t know about, like the need to play Angry Birds).

The resources below will help guide you as you continue to innovate while navigating choppy economic waters. And please – reach out to the Executive Advisors at RTEC if you have any questions about how best to confront the challenges before you.

• Improve satisfaction with your innovation investments: Build a ‘No Regret’ Portfolio
• Identify and the breakthrough trends impacting your industry: John Deere – Megatrend Assessment Filters
• Optimize your portfolio to better balance breakthrough and incremental innovation: Cytec- Explicit Project Scoring Standards
• Reduce the risk of your innovation investments: Air Products – Critical Uncertainty Prioritization