Why Honda is growing and Suzuki is falling.
How measuring your growth and innovation and comparing it against others in your industry can tell you if you are on the right track.
10 minutes read
What is your historical capability to turn investment into growth?
Understanding your historical capability to turn investment into a new idea into new market value is a critical first step in understanding where to focus improvement efforts to improve your personalized growth trends.
Next, if you position yourself against your competition, you can learn what high level actions you can pursue to become a growth leader. We studied the top 1000 companies revenues and their R&D spendings (raw data source: PWC – the 2018 Global Innovation 1000 Study) and came up with a data model that tells you where you place yourself against the industry’s 1st and 3rd quartile and an average.
With this data you can actually see which players are best in converting their R&D spendings into growth and thus make sure you know what their investment and M&A strategy is.
Let’s take a look at the following example.
Amongst the top 86 companies in Automotive and Components Industry, the growth rates has been quite stable throughout the last 6 years – we witnessed an average of 6% growth in revenue and the 2012-2018 CAGR totaled to 6.15%.
What about the innovation appetite? How hungry was the industry? When we take a look at the R&D spendings of the same sample we can see an average growth of R&D spendings somewhere at 7%. That means that on average companies were spending 7% more on their R&D year on year. Seems fair to say that they are aware of the importance of innovation and how it contributes to their growth.
But let’s stop here for a second.
How do companies go about measuring their innovation?
Do R&D spendings tell you everything about company’s innovation?
Well, nominally, they do tell you something. They show if at least you are trying. But what about the efficiency of converting $1 put into the R&D into growth. How well are you doing that? There are many ways to measure your innovation. (Pssst – we published a whole guide on what metrics can be used in measuring the innovation – here’s the article link). The problem with innovation is that by definition it is hard to measure. So what metrics should you use?
There are a few ways companies go about measuring their innovation. Some will measure their revenue streams and ROIs – financial KPIs coming from innovation products. Some will measure „leadership” indicators, like digital trainings, headcount in innovation or even time in minutes spent on innovating activities. Another way of approaching this topic is measuring process-oriented KPIs (usually combined with the financial metrics) like: new products launched, numbers of ideas processed, MVPs built and variations of those. A good innovation analytics combines all of them and measures them consequently over a long period of time, best in running numbers (you do want to know if what you are doing this month is better or worse in reference to the last quarter or an year).
There’s a but.
They all lack context. They can show you your ETA on the marathon, but they are not gonna show you if you will be the first one or the last one on the final line. You think your 7% R&D in Rev is a lot? Well you don’t know that until you know exactly what your competitors are spending and with what results.
Yes- end of digression.
Honda vs Suzuki – revenue levels – how fast do they grow?
Back to the case study. Let’s take a look at two major players in the Automotive industry and see what we could tell by looking at their Industry context.
Let’s take Honda – we know, that Honda has been doing very well since 2014. They have always been amongst leaders, but 2014 took them from being „an average” in 3rd quartile to being one of the market leaders in the industry. Next let’s take a look at Suzuki – 2012 they were starting as a very average in terms of their revenue, which throughout the years haven’t changed much with the tendency to take a position below the average level and increasing the gap over the last 3 year.
Honda vs Suzuki – R&D spendings – strategy
So what happened in 2013 to Honda that never happened to Suzuki?
Of course saying everything comes down to innovation activity is much of a simplification. However the thing is, that when you start looking at the benchmarks, like quartiles and averages in certain contexts, you start to see the trends and correlations.
Honda had a severe revenue drop in 2013 (-11%), yet, their R&D spendings were increased by 8% year on year. They had a strategy, that they were following. Suzuki, on the other hadn’t was acting more conservative keeping their budgets exactly where they kept their revenues – on the average of the industry.
Honda vs Suzuki – investment efficiency
Let’s take a look at the relative values. How effective they are at converting their investment into growth?
Apparently – more effective, than their fellow market players. The R&D in Revenue metric has been kept on a relatively low level compared to the overall market. This could mean, they just don’t spend much on the investment. But in the given context, where we know the consistency in increasing the nominal year on year budget as well as great growth rates in revenue, we can see, that Honda is pretty efficient in converting $1 from their R&D into revenue growth. Other top 25% of the companies in the Industry are spending more of the revenue slice for R&D, yet they are generating lower growth levels than Honda does.
As per usual, it is not a black and white case – if we assume, that the investment growth cycle is around 2-3 years, than the investments from 2013 should contribute to 2015-2016 growth. And that’s exactly what happens with Honda, seeing 2015-2017 highest growth rates. Then, in the following year, we can see the drop in the relative spendings, which despite nominal increase can mean, that Honda did cut down on the relative investment budgets, pushing the priority of R&D a little bit further down the backlog. Especially in 2015. And that could be reflected in 2018th growth rate drop as well.
What about Suzuki? Given the fact, that both – Revenue levels and nominal R&D spendings are almost precisely on the average level, we can tell, by looking at the relative values of R&D in Revenue, that things are not much different here – they position themselves on the average line, with a small tendency to spend a little bit more of the revenue slice on the innovations – that means, especially after 2014 growth that did not result in any additional growth in 2016-2017, that they should put some more effort on improving their innovation process methodology.
Of course, to get a full picture it would be ideal to see the relative year on year growth rates and where do those competitors place themselves among the competition. That would give us some of the missing puzzles and tell us if the nominal revenue growth rates that Honda achieved are equally contributing to their relative position on the industry scene.
What does that all tell us?
Measuring your innovation (and not only) metrics with appropriate context is crucial to know how are you doing as an organization, but also how are you positioning yourself on the market amongst others – both things being equally important if you have an appetite to become an industry leader.
So where are you?
Position your company against any competitor and industry.
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