Fernando Fischmann

Is Apple The World’s Most Innovative Company?

22 December, 2015 / Articles

The Boston Consulting Group ranks Apple as the world’s most innovative company in a report it issued last week. Apple has topped BCG’s list of 50 companies every year since 2005 when it inaugurated the ranking. That’s quite a contrast to Forbes’ 2015 list of the 100 most innovative companies. Apple doesn’t make the cut at all. Forbes’ No. 1: Tesla Motors, the Palo Alto electric car maker owned by billionaire Elon Musk. Tesla is No. 3 on BCG’s list. The second company on Forbes’ list, San Francisco cloud computing services company Salesforce, ranks on BCG’s list this year at No. 49. But the third company on the Forbes list, Alexion, the Cheshire, CT biopharma company that specializes in drugs for people with rare diseases, doesn’t make BCG’s top 50.

Why such a contrast? Methodology. BCG quizzed 1,500 senior executives representing a wide variety of industries around the world, simply asking them to name the most innovative companies both within their field and outside it. Those votes counted for 60% of the ranking. Then it looked at the five-year growth in total shareholder return, which accounted for 40% of the ranking. The problem with BCG’s method: It is backward-looking, failing to account for future innovation.

Forbes’ methodology is far more complex and skewed toward the future. See this post by Forbes contributors and innovation consultants Jeff Dyer and Hal Gregersen, who put it together. Dyer is a business professor at Brigham Young University and Gregersen at MIT Sloan. Together they run a Utah consulting and training firm called The Innovator’s DNA. They don’t base their ranking on popularity or, as they put it, “editorial whims.” Rather they look at how investors pick out firms that they believe are innovative right now and will be in the future. They take into account cash flows from existing businesses and the net present values of those cash flows. Then they compare those numbers with the current enterprise value (market capitalization plus debt, minority interest and preferred shares, minus cash equivalents). The methodology is a bit more complicated than that, using an algorithm that incorporates historical cash flows, but I think I’m conveying the gist. Looking through this lens, Apple has a positive premium of 10.2%, write Dyer and Gregersen, but that puts it way down at 282nd place.

Is that the best way to look at Apple? Numbers aside, you could argue that the company is iterative rather than innovative. Sure, it revolutionized personal computers, completely changed the way people get music and reinvented the smartphone. But aside from those big steps, which came years apart, it hasn’t modified its products very much, aside from small, steady improvements over time, like introducing lighter, more powerful laptops, better phone cameras and brighter, bigger screens. On a month-to-month basis, there’s not much happening compared to, say, Android, with its six-inch phablets, bending displays and split keyboards, seemingly released all the time. More important to Dyer and Gregersen, the numbers just don’t show Apple innovating in investors’ eyes.

But I talked to two partners at BCG who are co-authors of the report, Hadi Zablit in the Paris office and Andrew Taylor in Chicago, who convinced me that, despite the Forbes analysis, Apple is truly innovative. “Apple defines how you do innovation in mobile devices,” says Zablit. Apple sets the rhythm of the industry with its yearly launches, he says. “Samsung follows them.” Apple is also very good at expanding “adjacencies,” like launching mobile payments on smartphones and evolving its music offerings from buying songs to its new subscription service, Apple Music, introduced in late June (as of late October it already had 6.5 million subscribers). “They are a master at expanding their footprint to get new revenue,” he says. “Innovation is something new that a customer will pay for.”

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