How Not to Measure Innovation?
The decline of the U.S. stock market has fueled a debate regarding the methodology used to determine Forbes’ list of the world’s 100 most innovative companies. The list, published last month, was lead by expected heavy hitters such as Google and Apple alongside some lesser known players like Tencent Holdings at #4 and Salesforce.com at #1.
Kudos to Forbes for also allowing its writers to publish critiques of the list. Both business writer Bruce Upbin and innovation columnist Haydn Shaughnessy wrote analytical commentary regarding the methodology used rank the companies. The process calculated a company’s innovation premium by determining the proportion of a company’s market value that cannot be accounted for from the net present value of cash flows of its current products in its current markets. Or as Upbin says, “it’s the premium the stock market gives a company because investors expect it to launch new offerings and enter new markets that will generate even bigger income streams.”
There was no shortage of questions surrounding this process. Are investors are equipped to assess one company’s innovativeness over another’s? As Shaughnessy points out, “companies taking radical steps to adapt to the new economy are not going to be rewarded by the markets until they fully prove out those moves.” Can you determine innovation without factoring in published patents? And the question of the day, since the list begins with the calculation of a company’s price-earnings ratio, now that its market value has been crushed in a single day is it no longer a great innovator because the difference between its market value and NPV cash flows has plummeted?
While Updin’s article provides a detailed explanation of the rational behind the methodology from the survey developers, Shaughnessy suggests some insightful adaptations. What do you think after reading both viewpoints? Is the current methodology reflective of innovation or are modifications needed?
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