NEW YORK, March 15, 2005 CEOs from two-thirds of America’s fastest-growing private companies report that innovation is an organization-wide priority, and almost all say it has had a significant, positive impact on their business. Furthermore, the overwhelming majority rate their business better at innovation than their one or two strongest competitors. But, in this scenario, could something be missed? One in four of those citing innovation as a priority say they do not have an R&D budget. And, because of their definition of R&D, some may be overlooking the federal tax credit for research and experimentation, according to PricewaterhouseCoopers.
Building a Culture of Innovation

Sixty-eight percent of fast-growth CEOs say their company has made innovation an organization-wide priority. Among these businesses, innovation’s reach is extensive, including:

Corporate strategy

85%
New product/service development
78%
Corporate value
73%
Employee training
64%
Human resources
(hiring, performance reviews, compensation)
54%
Public relations, advertising, communications
43%
Recognition or award programs
41%
E-commerce/Website
34%
Eight in ten fast growth CEOs (81 percent) go so far as to rate their company more innovative than their one or two strongest competitors. Over the past five years, these more innovative companies have increased revenues by an average of 346 percent, versus only 138 percent for all others surveyed. And, looking ahead over the next 12 months, they expect growth of 22.0 percent, versus 13.3 percent for all others, or 65 percent faster.

“Already superior on innovation to their major competitors, Trendsetter CEOs continue to extend and deepen their influence throughout their organization,” said Jay Mattie, PricewaterhouseCoopers’ U.S. Private Company Services Assurance Services Leader. “The deep footprint of innovation in corporate strategy suggests that further impact can be expected elsewhere in the company.”

Eighty-four percent of CEOs making innovation a priority report it has changed the way they do business or affected their company’s financial performance in a number of important areas:

Revenues

88%
Earnings/profit margins
79%
Development of products/services
78%
Efficiency of own organization
78%
Number of customers
76%
Customer service
69%
Delivery of products/services
65%
Change in business processes
64%
Change in employee skill sets required
64%
Prioritizing investments
44%
Change in suppliers/supply chain
22%
Market capitalization
12%
“Emphasis on innovation has brought positive benefits to an impressive array of financial, marketing, and operational areas,” noted Mattie.

Nearly half of all “Trendsetter” companies (48 percent) have made an effort to link innovation to success metrics of their businesses. This linkage is higher among service companies, 55 percent, versus 38 percent for product sector businesses; and, to a lesser extent, among technology companies, 50 percent, versus 46 percent for non-techs.

For these companies, the success of their innovation programs is measured by its impact on:

Measuring Success

Overall revenue growth
78%
Customer satisfaction
76%
Growth in revenue from new products/services
74%
Increased productivity
71%
Earnings/ profit margins
68%
Recruitment and retention
34%
Market capitalization
17%
“Companies are using multiple measures to track success,” noted Mattie. “This practice enables cross-analysis as well as period-to-period comparatives.”

Connecting Innovation and Experimentation

But is there a disconnect lurking somewhere between innovation and R&D? Among CEOs citing innovation as a priority, 24 percent report not having an R&D budget.

“Unfortunately, these responses may reflect a belief that only the lab coat, cutting-edge, high-tech clean room environment is considered R&D,” says Kendall Fox, leader of PricewaterhouseCoopers’ national Research and Experimentation Tax Services practice. “Some businesses may be conducting R&D without calling it that. And, some may be more innovative than they are getting credit for—tax credit, that is. The IRS has loosened the eligibility requirements for product and process improvements that qualify for the federal Research and Experimentation (R&E) tax credit. Opportunities abound!”

PricewaterhouseCoopers’ “Trendsetter Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 139 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

If you have a question about this “Trendsetter Barometer” survey, please contact Pete Collins, survey director