Innovation Awards

How do you quantify corporate imagination? Meet the top companies on the first-ever Fast Company/Monitor Group Innovation Scorecard — firms where new ideas are a competitive advantage.

In 1897, James Henry Atkinson, a British inventor, came up with the notion of combining a small piece of wood, a wire spring, and a piece of cheese. He called it the "little nipper."

Procter Brothers, the Welsh company that bought the patent from Atkinson, has been fortunate that, in the 107 years since, no one has come up with a more efficient means of dispatching rodents. In fact, the company still commands 60% of the British market. For nearly every other business, though, building just one better mousetrap every century is not enough. To stay ahead, they must constantly search for the next idea that will best the competition.

Of course, successful innovation isn't simply a matter of coming up with ideas. It's the ability to nurture those ideas, make them work, and bring them to market that distinguishes a truly innovative company. With that in mind, Fast Company and global professional-services firm Monitor Group present this inaugural version of the Fast Company/Monitor Group Innovation Scorecard.

"Competitive advantage roots best in soil nourished by disciplined, sustained innovation — in assets, their configuration, the offerings they make possible, and the business models that support them," says Mark Fuller, Monitor's chairman and CEO. "But such discipline is impossible to sustain without rigorous — and relentless — efforts to measure and improve performance along all relevant dimensions."

The Innovation Scorecard will appear every three months in Fast Company, each time tapping the most innovative companies in one or two key industries. The project represents the most comprehensive attempt to date to quantify corporate innovation efforts. Just as important, each package will present compelling models for innovation strategy and culture.

Our first industry: telecommunications and networking equipment. Why telecom? Because it is one of the most dynamic and troubled sectors, a business where innovation is central to survival. We assessed 119 public companies on three crucial criteria: First, how they fared over the past five years — a rocky time for the telecom industry, to be sure. Next, how do the next five years look? How have companies invested in R&D, and what are expectations for growth?

Finally, what is their capacity for innovation? It's one thing to have built a better mousetrap and another to have a new trap in the works. But the true measure of a company's innovation is less about wood, wire, and cheese than it is about culture. It is difficult to institutionalize innovation. The notion of assigning order to a chaotic process seems contradictory. Yet companies such as Qualcomm thrive on an uneasy equilibrium between creativity and bureaucracy.

You'll find this a startling list. Nokia, which famously missed the consumer shift to flip phones, has been out of favor on Wall Street for several years; its emergence at the top of our list attests to the powerful innovation engine that drives the company. Polycom and Plantronics, both relatively unsung, are introducing one great new product after another. Think of this, then, as a scorecard of the future: If you want to know who will be leading the telecom sector a few years from now, you have to understand who the top innovators are today.

Your Customer Is Your Crystal Ball

Juniper Networks

  • Sunnyvale, California
  • Return on invested capital: 4%*
  • R&D spending/revenue: 25%*

Fast take: "Be careful which customers you choose," says Juniper marketing vice president Christine Heckart. Juniper courts customers at the technology frontier rather than devoting its energies to updating legacy systems. Says Heckart: "We pick customers higher up the mountain, companies that are facing the problems first." Identifying those cutting-edge problems, she says, allows Juniper a glimpse into the future.

How it works

In the late 1990s, ISP provider UUNET had a problem: 100% growth per quarter. While that may seem a nice problem to have, the company was headed for a train wreck, with routers stacked to the ceiling. Juniper focused on building a cheaper, faster, more stable router based on serverlike architecture. The result was a solution that used hardware to do the work of outdated software. Heckart calls it an "appliance approach," which provided the basis for a broader product offering. In 2003, Juniper again stationed itself at the leading edge by launching a global initiative to standardize Internet-protocol architecture. So far, the Infranet Initiative has signed up 25 companies, including Oracle, Microsoft, and AOL.

Challenges

The Internet infrastructure business has been slower than expected in 2004, with customers such as AT&T cutting services and delaying network upgrades. Meanwhile, Cisco hasn't taken kindly to Juniper's entry into the access-router market, responding with aggressive price cuts. — Lucas Conley

* Five-year averages. Data sources: S&P Compustat, Factiva, Monitor Group analyses.

Divide (Yourself) and Conquer

Nokia

  • Keilalahdentie, Finland
  • Return on invested capital: 31%
  • R&D spending/revenue: 10%

Fast take: How to loose innovation? Free it from a stifling centralized bureaucracy. In January, Nokia reorganized into four platforms: mobile phones, multimedia, networks, and enterprise solutions. The idea was to give potential growth areas both greater exposure and flexibility. A global strategy board ensures that new products match the overall vision.

How it works

Before reorganizing, Nokia was a $32 billion cell-phone monolith. That was great for driving volume, but the homogeneous approach overlooked smaller opportunities on the fringes. Now, Nokia says, each division acts like an incubator, where employees feel free to imagine new products or services taking root. Ideas flow faster, since employees have more opportunities for contact with customers, and an "essential market insights" group is tasked with steering customer insights toward product development.

Challenges

Nokia has lost market share to traditional rivals, and Asian manufacturers are storming the global market. While a recent pairing with Intel could boost Nokia's prospects, the big story is Microsoft and Motorola, an unholy alliance spelling trouble for the entire industry. — LC

Shoot for the Moon Plantronics

  • Santa Cruz, California
  • Return on invested capital: 31%
  • R&D spending/revenue: 10%

Fast take: Plantronics encourages engineers and designers to work independently of each other, creating prototypes that may never leave the lab. Tech jocks can go wild, freed from aesthetic or commercial obligations. Designers, unfettered by mundane limitations of technology, create prototypes that connect with consumer desires.

How it works

Plantronics asks consumers what they want — a headset with a range of 500 feet? One that transforms into a stylish necklace? — then works backward. "JFK sent people to the moon," says CEO Ken Kannappan. "He had a vision, even if he didn't know the challenges. Creating the vision provided a clear path and direction, defining problems that needed to be solved. In the same way, we look at headsets." Plantronics' innovations are taking the form of wireless headsets that work with VOIP; switch back and forth between your cell phone, work phone, and laptop; and, someday, will unlock your doors and start your car with voice commands.

Challenges

Plantronics is an analyst favorite, but rivals such as GN Netcom (which owns Jabra) are still very much in the headset game. Meanwhile, smaller companies like Aliph have proven that all it takes to crack the market is a great design. — LC

Feed the Pipeline — With Acquisitions

Polycom

  • Pleasanton, California
  • Return on invested capital: 15%
  • R&D spending/revenue: 29%

Fast take: Polycom, maker of the ubiquitous SoundStation conference phone, a staple of deal-making bankers and lawyers, is itself expert at acquisitions that stoke its innovation pipeline. That's no small feat, since only half of all acquisitions add value to the purchasing company within three years.

How it works

A 2003 Harvard Business School case study of Polycom's merger and integration process found that for every acquisition the company carries out, 20 are rejected. Hans Schwarz, Polycom's senior vice president for technology, explains that any prospective deal faces two hurdles. First, the target company must be loaded with technical talent. Second, the acquisition must increase Polycom's bottom line within two quarters. Schwarz points to the 2001 purchase of Accord Networks, an Israeli videoconferencing company. Polycom quickly grafted the new products into its existing line while keeping Accord's executives engaged. As one Polycom executive put it in the HBS study, "It was like sliding a card into a slot."

Challenges

The big question, especially as it increasingly bumps up against bigger rivals such as Cisco and Avaya: Is Polycom itself a target for acquisition? "Yes, that's a possibility," Schwarz says, while maintaining that his company plans to stay independent. — Ryan Underwood

Encourage Controlled Chaos

Qualcomm

  • San Diego, California
  • Return on invested capital: 14%
  • R&D spending/revenue: 15%

Fast take: Qualcomm, which has come up with advances ranging from satellite monitors to Eudora email software, maintains a productive balance between its nerdy technical side and bottom-line business acumen. So it is that what began in 1998 as a solution to an internal manufacturing problem has morphed into a marquee product. At the time, the company couldn't keep up with demand for its mobile equipment because writing custom software took so long. Its solution: a sort of operating system for wireless handsets. That software, called BREW, is becoming the standard for wireless-phone multimedia applications.

How it works

The idea grew out of a series of intense whiteboard meetings, says Peggy Johnson, president of the company's Internet-services division. "We have these wild staff meetings where, for a while, it's just pure chaos," Johnson says. "But you can only let the chaos go on for so long. Eventually, you have to have a moderator — in this case me — stand up and impose order."

Challenge

BREW soon may face the same challenges as Microsoft's Windows: new rivals and flat sales. Nokia has produced competing mobile software. And mature markets will only slowly trade up to phones that handle BREW-enabled applications. — RU

How We Did It

The Innovation Scorecard team started with a universe of 119 telecom and networking-equipment companies with market capitalization of more than $100 million each. We screened out companies with revenue declines and compounded annual shareholder returns of -10% or lower over five years. Then we screened for past performance: income and revenue per employee, five-year revenue growth and total shareholder return, and number of product awards. To gauge future potential, we looked at estimated five-year earnings-per-share growth, patents granted, R&D investment, R&D investment as a percentage of sales, and share price attributable to growth.

Of 29 finalists, 18 participated in an online survey and interviews that explored innovation capacity — the processes, tools, and culture created to support innovation. To determine the rankings, we weighted past performance scores at 30%, future potential at 30%, and innovation capacity at 40%.

Notable mentions

These companies didn't make the top five, yet they offer distinctive approaches to innovation.

Adtran Fast follower. This router maker invests little to nothing in market research, instead focusing development efforts on lower-cost alternatives to the inventions of rivals. In hiring, it targets skills that suit the fast-follower strategy.

Motorola Trend seeker. Its management board dedicates several meetings each year to investigating potential disruptive technologies.

NetGear Partnership. This equipment supplier stays three months ahead of competitors by churning out products created by a large network of partner companies, which keep intellectual property rights.

Research in Motion Customer insight. The BlackBerry folks absorb market trends from carriers, end users, third-party research, and a customer advisory group. Software in its beta versions captures how products are actually used.

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