Culture of Innovation
by Dr. James R. Gregory
In business, Innovation is a concept that constantly re-invents itself.
Whether invigorating established business segments with fresh ideas or inventing entirely new business categories, innovation has become a foundational value for today’s successful corporations.
But to be more than a buzzword, innovation must be supported and promoted by management and employees throughout a corporation’s culture. This consistent Culture of Innovation (COI) can be seen in the ways a company puts a priority on advancing new ideas that will create value across all operations.
In theory, a Culture of Innovation would seem to be a worthwhile pursuit for any company to nurture. However, measuring and valuing the financial impact of a Culture of Innovation has eluded many corporations. Typically, organizations define innovation as a focus on R&D, or by the number of patents granted and new products developed.
While these are all significant quantitative components of innovation, a cultural definition for innovation must encompass the entire company, and the quantifiable results should be reflected in the financial performance as a whole.
These thoughts opened my doctoral dissertation that I defended last August at the Muma School of Business, University of South Florida. I was curious to find out how an engaged audience of impartial observers viewed the importance of a Culture of Innovation.
Culture of innovation and its impact on the cash flow multiple
Utilizing the quantitative research database of the CoreBrand Index™ (CBI) my dissertation studied, for the first time, the impact of the Culture of Innovation attribute associated with 160 large public companies. The findings were then analyzed with the cash flow multiple (CFM), which is a firm-wide financial variable that explains the premium investors are willing to pay over the cash flow of the corporation.
The CFM is calculated by dividing the stock price per share by the cash flow per share, which provides a calculation that reflects the premium value of market capitalization. Since estimates of future cash flow are a component of quarterly reports, the CFM has the advantage of being able to project expected returns into the future; this helps a company to evaluate the potential return on investment (ROI) for capital spending required for improving—and innovating—intangible assets.
The analysis evaluated whether COI is more or less predictive of the CFM than historical attributes collected in the long running, and highly reliable CoreBrand Index. The dissertation verified CoreBrand’s past research and reconfirmed that each of the individual attributes in the CoreBrand Index contributes a positive effect to the firm’s market value.
The study supported the conceptual framework that adding the additional attributes to the intangible assets of a company could explain even more of the unexplained variable associated with stock market value, which is paramount to the development of the emerging theory of intangible capital.
By adding Culture of Innovation attribute to the historical attributes measured by CoreBrand, the predictability of the cash flow multiple improved from 64% to 77%. This is not only statistically significant, but also an important breakthrough on the ability to forecast the potential return for investments made in intangibles such as brands.