Wall Street Just Doesn’t Understand Innovation

Over the last 30 years, the companies that have been able to innovate effectively and make good use of their research and development (R&D) budgets have become coveted companies, but the market doesn’t value them accordingly. While the market can be quick to jump on the latest craze and push certain hyped stocks to new heights, the companies that innovate effectively aren’t always given their due until after the fact. Most of the time Wall Street, tends not to properly value the companies on innovation because of its relative difficulty to quantify. With innovation not being something that is universally measurable in the same way that profits, revenue, and cash flow can be, most investors tend to shy away from the analysis of innovation.

Innovation is often the most valuable asset that a company has when it pays off, think Apple over the past 15 years, but without proper quantification this value is rarely taken into account. Investors are uneasy by the possibility that R&D is uncertain, but analysts have found that using the track record over the previous five years as a relative guide, can predict the value. Within the companies that have a large R&D spend, that are generally considered to be more innovative, the past tends to be a very good predictor of their future success. Often these companies that have a proven record of innovation success over the previous few years will outperform their competitors by over 7 percent a quarter. This translates into big profits resulting from the innovative approach.

While Wall Street may be hesitant to make their decisions based on these studies, there is no doubt that the innovation process can be the differentiating factor between competitors. Increasing the R&D spend without tightening the innovation process can be one of the reasons that many companies don’t string together a good record of innovation. Innovation can also be fickle as even the top companies can have a year or two of bad R&D performance, but most companies that focus on the process and continually increase their innovation spends see financial gains before Wall Street.

Whether you are looking to increase your company’s innovation spend or tighten the innovation process there are great metrics that can be gained from Wall Street attempting to quantify innovation. By providing data that they can use to analyze the companies more effectively, you can adapt this same information for your company to measure the success of your process and improve your results. Most companies will benefit from these metrics as much as or even more than Wall Street will, if they are willing to use them.

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