Innovation Index

Posted by Principlessa2222 at 7:32 PM

With the world focused on the the Dow index as the US economy is in turmoil, the S&P/BusinessWeek Global Innovation Index provides an interesting look at how 25 of the most innovative public companies around the globe are performing. The Global Innovation Index is a new measure (created Feb 2008) of how innovation is proving to be an important factor for successful companies.

The Companies
The companies included in the index are based on BusinessWeek's Most Innovative Companies rankings. The list is created with a number of sources. "Each company's weight in the index is derived from a combination of two rankings. The first is a qualitative ranking based on the company's position in the annual BusinessWeek/BCG survey. The second is a quantitative ranking based on three factors used to estimate a company's innovation—three-year earnings growth; three-year sales growth, and R&D as a percentage of sales. A composite score is calculated for each company by adding the qualitative and quantitative scores. For details, go to www.indices.standardandpoors.com. "1

37 percent of the companies are in the tech industry and the 25 companies represent five countries.2

The index will be rebalanced each May after the Most Innovative Companies ranking is published in BusinessWeek.

Performance
"Historical data show that the S&P/BusinessWeek Global Innovation Index companies outperformed S&P Global 100 Index companies by more than 7% in 2007 and have done 5% better since the middle of 2005." 3 In 2007 the Innovation index outperformed the S&P Global 100 Index by 7%.

I tried to look up how the idex was currently performing, but I was not able to locate the ticker on Bloomberg or the S&P Website.

Pitfalls
One potential problem of this scale is that the companies included are only evaluated every year. A company's strategy and innovation pipeline can change dramatically in a year. What was once an innovative company, can grow stale or have a couple of dud launches.

Another potential challenge is with defining what qualifies companies and "innovative." The index is somewhat subjective as there is a qualitative aspect in determining which companies are included. In addition, a new innovative start up will not have three years worth of history outlined in the index definition.

1 "A New Innovation Index - The S&P/BusinessWeek Global Innovation Index"; BusinessWeek; Feb 2008; http://www.businessweek.com/innovate/NussbaumOnDesign/archives/2008/02/a_new_innovatio.html
2 "S&P/BusinessWeek Global Innovation Index"; Standard Poor.com; 2007
http://www2.standardandpoors.com/spf/pdf/index/Tickers_ETF_chart.pdf
3"S&P/BusinessWeek Global Innovation Index"; BusinessWeek; May 1, 2008; http://www.businessweek.com/innovate/content/feb2008/id2008027_367300.htm

 

5 comments:

  1. japeri said... October 27, 2008 at 3:18 PM

    Composition of the scale is another potential weak point. The scale is composed of three measurement variables, one of which is money spent on R&D. R&D expenditures are not a substitute for actual innovation; plenty of companies spend fruitlessly on innovation. While there may be a correlation between R&D expenditures and actual innovative products introduced, it seems as though the scale could better measure innovation. One way to do this is to include a variable of the actual number of new products introduced. Another variable could assess the time factor - which new products survived in the market for X number of years. Even then, you could another variable that measures displacement - which new products disrupted the market and gave rise to a new product category. Of course, now things start to get messy. I guess the point is that measuring innovation is no simple task that can be quantified.  

  2. Principlessa2222 said... October 28, 2008 at 7:14 AM

    Great point! I love the idea of including number of new products launched and evaluate how they did in the market. Having both would help balance companies that develop new products with a long development timeline. Although these companies might produce fewer products than say a CPG company, they would also be evaluated on performance of the products.  

  3. lehufschmidt said... October 28, 2008 at 8:19 PM

    The fact that companies that invest and subsequently rank high in the innovation index outperform S&P Global 100 Index companies is a huge selling point for commitment to Innovation. I would be curious to know what these companies are doing that others are not to realize such success.  

  4. Schwald said... December 1, 2008 at 6:51 PM

    I think it is a step in the right direction that innovation is even being attempted to measure and use as a criteria for success. There are bound to be some pitfalls along the way and I am sure it will be difficult to please everyone's ideal mesurements. That being said, I am curious as to how they define innovation and if along the innovation spectrum some companies have higher returns.  

  5. Jeffrey Xie said... December 18, 2008 at 5:35 PM

    Yeah, an index is a good way to assess the innovation of a company. Meanwhile, I would think that the index itself may need better design to evalute more on importance and impact of innovations as well as the scale of innovation...  

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