Are Innovative Companies More Profitable?

In a word, yes. But the crucial variable is not company size or location or the age of the workforce or the choice of software or hardware brand: it's how the culture of the organization fosters the intellectual and human capital growth that creates ideation. JL

Dylan Minor and colleagues report in MIT Sloan Management Review

The key variable that predicts successful innovation across these companies is ideation rate: the number of winning ideas generated per 1,000 active users. We found a significant correlation between the ideation rate and growth in profit or net income: The more ideation, the faster they grew. Healthy ideation and net income growth are a result of  a culture of innovation.When a corporate culture is designed not just to encourage innovation but to systematically nurture employee ideas, the results are dramatic.
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.

Profit Growth Is Correlated With More Accepted Ideas

Looking at 28 companies using ideation management software over two years, the authors found that the greatest number of ideas per 1,000 users correlated strongly with a company’s profitability and growth.

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. The left side of the chart is illustrative, too. When we look at the ideation laggards — companies with ideation rates below 100 winning ideas per 1,000 active users — about half of them had no growth in profits at all.
Growing companies need ideas, and companies that generate lots of good ideas tend to have profitable growth. But it’s unlikely that simply goosing up the ideation rate is what made these companies grow profitably. A more likely explanation is that both healthy ideation and net income growth are a result of a third factor: a culture of innovation.
When a corporate culture is designed not just to encourage innovation but to systematically nurture employee ideas, the results are dramatic. Companies like this boost employee participation in innovation challenges created by management, generate more actionable ideas, and then implement those ideas in a way that generates profitable growth. As a result, you can actually assess the level of innovation at a company on a quarter-by-quarter basis by measuring its ideation rate.
When you visit one of these innovative companies, you can feel a palpable difference in the way the company welcomes ideas from employees.
Consider the case of a company that operates hundreds of medical clinics. Because of the decentralized nature of this business, the company empowers its field workers to solve problems. The mindset of employees is, “I have a voice; my opinion and ideas matter.” So it made sense to tap into that same problem-solving energy across the company to improve operations and efficiency.
For example, a local worker at one of the company’s clinics identified a common problem: helping patients who experience dry mouth during a time-consuming type of therapy but are on a restricted fluid intake. The solution they came up with was to create a spray bottle that was printed with reminders of the best ways that patients could manage their fluid intake — educating the patient with the actual device they were using to cure the dry mouth problem.
Problem-solving of this kind happens in every company. But with this company’s culture of innovation, the workers solving the problem naturally thought, “Who else could benefit?” As a result, they posted their solution on the company’s idea hub, and it eventually became a nationwide standard that improved the patient experience in all the company’s clinics.