NEW YORK (TheStreet) — To understand the importance of innovation, look at two companies, Apple(AAPL_) and Eastman Kodak(EK_). Sixteen years ago, Apple was at a low point and Eastman Kodak was at a high point, and now their roles are pretty much reversed. What is the common factor? Innovation, and the lack thereof.
I want to point out that this goes beyond tech companies. Innovation among other, lower tech companies can still lead to superior results, and ultimately, that nectar of the gods, alpha. See below for my listing of boring but innovative companies I have been buying.
Aside from my buy list, these companies also occupy another list: they are among Thomson Reuters’ top 100 global innovators for 2011. To make the list, a company’s degree of innovation was measured by incidence of success in securing patents, overall volume of patents, degree of influence, and the number of quadrilateral patents, also known as patents for the same invention at foreign patent offices. Almost 75 out of the 100 companies listed enjoyed stock price increases last year, according to Reuters.
Within these companies, I have observed the following common elements:
They gain market share by offering better, more innovative products than the competition, rather than simply finding ways to cut costs. Raising revenues by cutting costs is the option every CEO has at his or her disposal. But raising revenue with new, innovative products? That requires a rarer, more valuable skill set.
They realize that different markets require different strategies. McDonalds(MCD_), seemingly a very low-tech company, was able to adapt its supply chain logistics to offer beer in Holland and rice in Asia.
Management is restless. To wit: what if Apple was still focusing on desk top computers?
Has the constant need to come up with new better products. It gives the company an excuse to get in the news, gives it material for commercials, shows that they value progress and R&D, and opens up to a lot of experimentation which can lead to the next big thing. Think of where Apple would be if they stuck with just computers. Or the Yellow Pages if they did not put together a highly workable website.