US Private Companies Prioritizing Innovation as Growth Engine

PwC's Private Company Trendsetter Barometer tracks the business issues and best practices of privately held US growth businesses. It incorporates the views of 226 CEOs/CFOs: 125 from companies in the product sector and 101 in the service sector, averaging $256.0 million in enterprise revenue/sales and including large, $300 million-plus private companies.

New York, December 15, 2011 — With the pace of US economic recovery remaining sluggish, leading privately held businesses are putting greater emphasis on innovation as an engine for growth, according to chief executives surveyed for PwC US’s Private Company Trendsetter Barometer. Three-fourths (75%) of those businesses have made innovation a priority — 33% of them to a great extent and 42% to some extent. Nearly half (47%) of innovation-focused private companies expect that their innovations (ranging from incremental to breakthrough) will have a significant impact on the way they do business over the next one to three years, and 39% expect a moderate impact.

Innovation Most Important to International and Fast-Growth Companies
Most international marketers (87%) prioritize innovation, whereas just slightly more than half (55%) of their domestic-only peers do the same. Among international marketers that focus on innovation, 44% are doing so to a great extent (versus 24% of their domestic-only counterparts). More than half (52%) of international firms that have made innovation a priority expect it will impact their business significantly, compared with 42% of domestic-only innovators. Overall, more Trendsetter companies with an emphasis on innovation sell internationally (55%) than their non-innovator peers (25%) — the percentage of those engaged in international marketing is even higher among companies that prioritize innovation to a great extent (63%).

US private companies that have made innovation a priority also expect to grow 63% faster than non-innovators, forecasting 8.3% revenue growth over the next 12 months versus 5.1% for non-innovators. Trendsetter companies emphasizing innovation to a great extent are the fastest-growing businesses, forecasting 10.1% revenue growth over the next year — nearly twice the rate of  non-innovators. They are also more likely to be planning new hiring (59%) and major new spending initiatives (51%) over the next 12 months.

“Innovation is essential in today's challenging business environment,” says Ken Esch, a partner in PwC’s Private Company Services practice. “Slow economic recovery and intensified competitive pressure at home are pushing private companies to find new ways to grow and differentiate themselves — both here and abroad. Staying ahead of the curve by coming up with new products and services, coupled with innovative ways of developing and delivering them, should help private companies broaden their reach in current markets, as well as penetrate new ones.”

The strong correlation between innovation and growth is illustrated in the table below:

Table 1: Innovator's Profile

 
Innovation a Priority
 

To Any
Extent

To a
Great Extent

To Some
Extent

Not a
Priority

  • Percent of Sample
75%
33%
42%
25%
  • Own company revenue over the next 12 months
8.3%
10.1%
7.0%
5.1%
  • International Sales
55%
63%
48%
25%
    • Contribution to total revenue over next 12 months
18%
18%
17%
21%
  • Plan new hiring, next 12 months
51%
59%
45%
41%
  • Plan major new investments of capital, next 12 months
41%
51%
34%
27%
  • Expect increased operational spending, next 12 months
75%
81%
71%
61%
    • Information technology
39%
48%
33%
34%
    • New product/service introductions
38%
51%
28%
14%
    • Sales promotion
26%
25%
26%
13%
    • Geographic expansion
23%
29%
18%
20%
    • Research and development
20%
32%
10%
5%

Cost Containment a Secondary Goal, Topped by Growth Objectives
While improved productivity and reduced costs are among the broad business objectives that private companies expect innovation to help them achieve (cited by 58% and 52% of respondents respectively), growth-related goals top the list. Those goals include improved earnings/profit margins (81%), increased revenues (78%), and a widened customer base in current markets (78%). The percentages in these growth-related categories are even higher among companies that say they're prioritizing innovation to a great extent: 91%, 80%, and 87% respectively.

This emphasis on growth carries over to additional, supporting objectives, such as improving current products/services (cited by 78% of  innovators overall) and developing new products/services (cited by 87% of companies that prioritize innovation to a great extent, and by 64% of innovators overall). Companies prioritizing innovation to a great extent also expect to engage customers in developing/improving products and services (68%), while Trendsetter innovators overall say they expect to use innovation to improve customer service/product support (69%).

Considerably fewer innovators are using innovation to create new markets for products/services that are still in the conception/development stage (37%), set long-term corporate strategy (34%), or modify their business model (31%), although Trendsetter companies prioritizing innovation to a significant extent are showing greater initiative in the first two areas (55% and 40% respectively).

“Private companies see innovation as a driver of growth on a variety of fronts," says Esch. "Increased revenue, profitability, and market share are key near-term objectives, but innovation leaders are looking beyond that. They're considering ways to propel their businesses into the future so that they stay relevant for the long term — not just several years from now but a decade or more down the line. These leading-edge innovators are looking to develop novel products for as-yet-uncreated markets, along with entirely new ways of delivering them — an endeavor requiring revamped business models and farsighted corporate strategy.”

Increased Spending Planned, But Innovation Funding a Key Challenge for Some Companies
Two-thirds (66%) of innovators expect their overall level of innovation spending to increase over the next one to three years — 18% greatly and 48% somewhat. Most other innovators (32%) anticipate that their spending will stay about the same. In this latter group, 79% say they continue to get the same innovation value as before while spending the same or less. Another 16% say they're innovating by actively soliciting input from customers or suppliers.

Investment in adopting new technologies to enable/support a host of other innovation goals (cited by 49% of Trendsetter innovators) may be a key factor that's allowing private companies to do more with less. Overall, innovation spending is expected to rise by an average of 19.4% among companies that are planning increased investment in that area. Trendsetter companies prioritizing innovation to a great extent plan to spend slightly more than other private company innovators, with 75% of them forecasting an average increase of 23.3%.

“We find that many companies are quick to correlate spending more with doing more," says Esch. "However, we believe that the emphasis should be on how you put your innovation dollars to work, not on the amount you spend. To extract the greatest value from its innovation investment, a company will need to strike the right balance between incremental and breakthrough innovations. How quickly the business wants to grow will dictate how much breakthrough innovation is required."

One-quarter (25%) of Trendsetter innovators cite insufficient access to capital as a key challenge to pursuing innovation over the next one to three years, this in addition to talent shortages/inadequate skill sets (26%) and lack of disciplined in-house processes for driving and executing innovation (25%). For the one-quarter of Trendsetter companies that identify themselves as non-innovators, insufficient capital is the leading barrier to innovation (36%), trailed by talent shortages (22%) and lack of disciplined in-house processes for driving and executing innovation (18%).

"A company with limited financing may want to consider co-developing innovation via alliances and joint ventures,  including with supply-chain partners," notes Esch, "since that  would allow the company to capitalize on opportunities while managing costs and risks.”

Disciplined Approach a Must
Although lack of disciplined in-house processes for driving and executing innovation is cited as a top barrier to innovation by one-quarter (25%) of innovator companies, only a minority (41%) of Trendsetter innovators report having a coordinated cross-departmental strategy for innovation (however, that number jumps to 59% within the subset of companies prioritizing innovation to a great extent, then dips to 26% among companies prioritizing innovation somewhat). Departments that Trendsetter companies are engaging in an integrated approach to innovation include marketing (cited by 86% of Trendsetter innovators), business development (73%), finance (70%), information technology (68%), and sales (67%).

“The importance of defining an operational strategy and establishing a set of coordinated processes for innovation can’t be overstated," stresses Esch. "While every company will have its own tailored approach for executing innovation, a successful program will depend in large part on having the right departments involved, with clear direction and support from leadership.”

Measuring and Rewarding Innovation
Measuring progress is a crucial component of a successful innovation strategy. Among Trendsetter innovators, 44% link innovation to the success metrics of their business; the percentage is higher (63%) among private companies that prioritize innovation to a great extent. Top metrics include customer satisfaction (cited by 79% of Trendsetter innovators), market expansion (72%), earnings/profit margins (69%), growth in revenue from new products/services (68%), and overall revenue growth (64%). Companies prioritizing innovation to a great extent pay less attention to reduced operational costs as a key metric (36%) than do other private company innovators (57%). Somewhat surprisingly, employee recruitment/retention as a metric trails behind at 32% for Trendsetter innovators overall, despite half of those companies saying they expect innovation to help them attract and retain top talent.

"By embracing, measuring, and rewarding innovative efforts, private company leaders help to foster a culture of innovation," says Esch. "It's important, however, that they not only reward quantifiable benefits in the near term, but also tie innovation efforts to long-term corporate strategy. Right now, most Trendsetter companies aren't doing that. They are well-positioned to do so, however, generally having greater flexibility than their public counterparts when it comes to waiting for a return on innovation investment.”

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(1) 2009 Forbes America's Largest Private Companies List

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