[Deutsche Fassung]

Will innovation create sustainable, long-term competitive advantages? Is there a positive connection between successful innovation (with regard to either products or procedures) and corporate success? The answer to both questions is clearly “yes”. That is the ultimate result of a study on “Technologische Kompetenz und nachhaltiger Wettbewerbsvorteil” (“Technology Competence and Sustained Competitive Advantages”, available only in German) published by the Institute of Technology and Process Management at Ulm University in March 2012. Prof. Dr. Leo Brecht, the director of the institute, says that the study aims to show how technology competence can boost competitiveness, in what way well-performing technology-oriented SMEs differ from their less well-performing counterparts and what the differences between SMEs and larger companies are. 175 companies from all German regions participated in the study. Most of them belong to the mechanical engineering, automobile and metalworking sectors.

Bundle of competences is key

According to the study, technology competence consists of non-structural abilities (culture/ability to learn) and of management abilities, both for technology and production-related processes and for ancillary idea and knowledge management processes. Technology competence has an impact on the success of innovations and will ultimately result in sustainable, long-term competitive advantages. The chart below shows the fundamental chain of cause and effect:

(Source: Ulm University, Institute of Technology and Process Management

The study confirms that successful product and process innovation depends on a bundle of competences. Professional management and an innovation-friendly corporate and learning culture are key for innovativeness. Systematic idea and knowledge management will support the management of production and development processes. Good resources alone are not sufficient. Ample financial, structural and human resources (R&D budget, number and qualification of employees, quality of equipment) are necessary, but not sufficient conditions for successful innovation.

Degree of innovativeness and frequency of innovations differ

An analysis of the degree of innovativeness and the frequency of innovations in German industry leads to the following results:

• The degree of market innovation (MI) – this measure describes to what extent a company’s new product differs from existing products on the market – tends to be moderate across all sectors. It is highest in the electronics and lowest in the plastics industry.
• The relative degree of innovation, which describes the degree to which the innovation is new for the company and to what extent internal procedures need to be adjusted, tends to be low across all sectors. It is highest in surface and heat treatment companies and lowest in the aviation industry.
• The frequency of product innovations, which describes the frequency and scope of new commercial products, is quite high across all sectors according to the study’s results. It is highest in the electronics industry and lowest in steel and light metal engineering.
• The frequency of process innovations, which describes the frequency and scope of amendments to internal procedures, is high across all analysed industrial sectors. Once again, it is highest in the electronics industry and lowest in steel and light metal engineering.

Across all sectors, the degree of innovation (product and process innovation) is highest among producers of other metals products and lowest in steel and light metal engineering. In contrast, surface and heat treatment companies come first in terms of product and process innovation frequency, with steel and light metal engineering once again carrying the red lantern.

Innovation efforts pay off

There is a clear distinction between the benchmark group and the stragglers in terms of the degree and frequency of innovations. This observation applies to both SMEs (12 out of 114 companies belong to the benchmark group) and larger companies (5 out of 61 form the benchmark group).

Small and medium-sized companies (Source: Ulm University, Institute of Technology and Process Management)

Larger companies (Source: Ulm University, Institute of Technology and Process Management)

The charts show that both among SMEs (upper chart) and larger companies (lower chart) the benchmark group is more innovative and (what is even more important) releases innovations much more often than the stragglers. This effort pays off. The companies of the benchmark group are more successful in terms of product and process innovation and more profitable in terms of EBIT and return on sales over the past five years (for more details see a second blog entry).

In view of this simple and convincing chain of cause and effect, one should bear in mind Hermann Simon’s aphorism: “The first innovation of every day should be to remember that regular innovation is necessary.”