Human Capital Briefs

The Three Most Innovative Companies of 2013

February 14, 2014

One can naturally debate any system that seeks to crown the world’s most innovative companies. Boston Consulting Group’s list, which relies heavily on surveys asking senior executives to name the companies they perceive to be innovative, risks succumbing to the halo effect, where generally successful companies are assumed to be good at everything. Forbes’s mathematical approach, which calculates an “Innovation Premium” baked into a stock price, suffers from market capriciousness. Editorial driven approaches at MIT Technology Review and Fast Company can trip over hype (recall how Fast Company in 2009 named “Team Obama” its most innovative company?).

Nonetheless, if you want a fun ice-breaker at your next team meeting, ask people to guess which three companies made it to the top 50 on all four lists (only 29 made it on two or more, and only seven are on three or more). You can even give a hint – two of the three are technology companies from America’s West coast, and one is from Asia.

If your groups are anything like the ones I’ve been with over the past few months, they will assume that the American companies are some combination of Google, Apple, and Amazon. Apple is perhaps the surprising odd man out of that troika, ranking 79^th in Forbes’s list (owing primarily to a somewhat bumpy stock price, which to Forbes indicates a lack of investor confidence in its ability to innovate in the future).

But if you’d guessed Google and Amazon, you’d be right. Both trace their success to bringing new business models to their respective markets. While Google is commonly viewed as a search company, what made Google Google was figuring out how to parlay its search technology into a highly disruptive advertising model by which companies bid to tie their advertising to specific search terms. In recent years the company’s free, flexible Android operating system – a stark contrast to the closed, proprietary systems that historically dominated the industry – has helped new competitors like Samsung from South Korea and ZTE from China offer devices that are both low priced and highly functional.

Amazon continues to be the world’s best example of a serial business model innovator. Its core e-retailing model, with its hyper-efficient supply chain, turned the retail world on its head. It has subsequently launched three successive disruptive business models. Its Prime subscription model now provides close to $1 billion of revenues. With its Kindle e-reading platform, the company happily sells low-cost devices and makes money on content. And through its Amazon Web Services business, it has built a multibillion-dollar business by turning its internal technology prowess into a powerful cloud-computing service.

So, which is the third company on all four lists? Some guess Korea’s Samsung (on three); Japan’s Toyota (on two); China’s Huawei (interestingly, on none of the lists); or Alibaba (also, shockingly, on not a single list). The home country of the latter pair is right, but the right company is Tencent.

Tencent remains relatively unknown outside Asia, but that won’t last long if its torrid growth continues.  Its core offerings — its QQ instant-messaging service and WeChat SMS service — aren’t particularly interesting. But it follows a business model that is distinct from most of its competitors. Instead of seeking to build wide audiences and parlaying them into advertising revenue, the company has built a multibillion-dollar business out of micro-transactions, such as charging consumers to upgrade the look of the avatar that appears on their chat service. Hundreds of millions of small transactions add up, powering the company’s explosive growth. A chart in a recent Economist article says it all. Global Internet giants like Baidu, Google, and Facebook each draw at least 80% of their revenues from advertising. Tencent has flipped the model, earning about 80% of its $7 billion annual revenues from value-added services.

Innosight research shows that business model innovation is the ticket to explosive growth. In Seizing the White Space, my colleague Mark Johnson noted that more than half of the relatively recent companies that made it onto the Fortune 500 before their 25th birthday—including Amazon, Starbucks, and AutoNation—were business model innovators. It’s easy to get captivated by shiny technology or compelling marketing, but if you really want to identify tomorrow’s giants, pay the most attention to innovators that have figured out how to create, capture, or deliver value in unique ways. History shows they are the best bets for long-term success.

 

This article first appeared in the Harvard Business Review on 12/31/2014.

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