Author: Illuminas

A groundbreaking study recently released in the Journal of Service Research, titled “Customer Perceptions of Firm Innovativeness and Market Performance: A Nation-level, Longitudinal, Cross-Industry Examination”, reveals a crucial link between customers’ perceptions of a firm’s innovativeness and its financial performance. This research, spanning 2018-2022 and covering 123 publicly traded firms across 20 industries, underscores the economic significance of customer viewpoints, often overlooked in traditional innovation measures.

In an era where service-dominant economies prevail, the study challenges the traditional, manufacturing-centric metrics of innovation such as patents and R&D activities. It presents a novel approach, focusing on how customers perceive firm innovativeness, a vital yet under-explored area in both the management and scientific literature.

The study’s analysis, based on data from the American Innovation Index (Aii), shows a strong, positive correlation between customer-perceived firm innovativeness and abnormal stock returns (i.e., the difference between a stock’s actual return and its expected return). For every five-point increase in a firm’s Aii score, there’s an associated average increase of $2.8 billion in shareholder wealth for the firms in the investigation. Additionally, it highlights a similar positive relationship between changes in customer satisfaction, as indicated by the American Customer Satisfaction Index (ACSI), and abnormal stock returns.

 

Managerial Implications:

Need for New Metrics: Managers should broaden their focus beyond traditional innovation metrics to include customer perceptions of innovativeness.

Active Tracking and Response: Firms should actively track customer perceptions and respond with strategic innovations that resonate with consumers.

Marketing and Communication: Effective marketing strategies are necessary to showcase innovation efforts and to enhance customer perceptions of a firm’s innovativeness.

Investment in Innovation: Investing in innovative practices and customer co-creation has the potential to enhance customer perceptions and, consequently, firm performance.

Implications for Investors:

Investors are encouraged to include customer perceptions of innovation in their decision-making processes. This factor serves as a potential indicator of firms poised for superior financial performance.

Conclusion:

This research is pioneering in its examination of the financial impact of customer perceptions of innovation. Future research should delve into the drivers of customer-perceived innovativeness, explore the role of cultural factors, and examine the interplay between innovation, environmental sustainability, and social outcomes.

The study presents a significant reorientation in understanding innovation’s role in driving economic growth and firm performance. By aligning managerial focus and investor analysis with customer perceptions of innovation, companies can unlock new avenues for growth and competitive advantage. This approach not only presents an opportunity for enhanced financial returns but should also foster a culture of customer-centric innovation, crucial for long-term success in today’s dynamic market landscape.

 

Read the entire article here: https://journals.sagepub.com/doi/10.1177/10946705231220463

Authors: Timothy Keiningham, Lerzan Aksoy, Alexander Buoye, An Yan, Forrest V. Morgeson, III, Gina Woodall, Bart Larivière

Employers have faced significant disruption over the past few years, from the effects of the coronavirus pandemic to the rise of artificial intelligence, forcing companies to innovate or risk going out of business.  Many employees have also reevaluated the meaning of work and the importance of factors like work-life balance, employee well-being, and social responsibility.  Employees are increasingly looking for more than a steady paycheck and benefits.  We know from our extensive research on the subject that innovative companies have more loyal customers and better stock returns, and our latest research continues to show that innovative companies also have more satisfied and loyal employees.  Companies perceived by workers as being innovative are more successful in satisfying employees, and this innovative environment drives loyalty, enabling companies to retain the skilled workforce needed for success.

Employers know it is essential to attract and retain talented staff and spend significant time and money doing so.  Despite these efforts, employee satisfaction and loyalty in the U.S. are at modest levels.  Based on the results of our recent survey with a cross-section of workers conducted by Illuminas in mid-2023[1], fewer than six in ten employees (58%) are highly satisfied with their current job, and only 54% are highly likely to recommend their current organization to a friend or colleague considering a position there.  In addition, four in ten workers (39%) would be very likely to accept a job offer for a different organization that had better compensation and benefits than their current job.  While tangible factors like compensation and benefits can play an important role in employee satisfaction and loyalty, intangible factors such as corporate culture can be equally important.  In this research, we looked at the role that innovation plays in employee satisfaction and loyalty.

To study the role of innovation, we relied on metrics from the American Innovation Index™ program that Illuminas conducts in partnership with Fordham University and the Norwegian School of Economics.  This national study evaluates worker satisfaction and loyalty as well as employee perceptions of the innovativeness of their current company.  One metric, the American Innovation Index™ (Aii), scores perceptions of innovation based on the employee’s view that their employer is innovative, creative, a category pioneer, and a game changer with its products and services.  A second metric, the Social Innovation Index™ (Sii), scores perceptions of social innovation based on the employee’s view that their employer makes benefitting society and the environment a priority, offers goods and services that are beneficial to society and the environment, and comes up with innovative solutions to problems in society and the environment.

Our study reveals that employees working for employers they perceive as highly innovative tend to have higher job satisfaction and higher likelihood to recommend the employer (see Figure).  Job satisfaction is 89% among employees who perceive their companies as highly innovative, 49% among those perceiving their companies as moderately innovative, and 25% among those who perceive their companies as low in innovation.  Employee loyalty follows a similar pattern, with 83% highly likely to recommend among those in companies high in innovation, 48% among those in companies perceived as moderately innovative, and only 19% in those among companies perceived as low in innovation.  We believe that employees value working in a creative environment for an employer that is committed to driving change in the marketplace.  The higher the innovativeness of an employer, the more likely employees are to be highly satisfied and loyal to that employer.  Social innovation is also important, as concerns such as global climate change, sustainability, corporate altruism, and corporate diversity have gained visibility over the past few years.  As shown in the figure below, employees are more satisfied and loyal when they perceive their employer to be innovative in achieving altruistic goals.  The relationship between satisfaction and social innovation (Sii) is nearly as strong as the relationship with business innovation (Aii).

The role of innovation is more complex when evaluating employees’ likelihood to accept a job offer at a different organization if offered better compensation and benefits.  As the figure above reveals, employees in companies that are perceived as low in innovativeness are more likely to accept the offer (49% low versus 28% moderate).  We believe low innovation environments are less engaging and result in higher turnover.

However, four in ten in high innovation workplaces would be very likely to accept an offer with better pay and benefits, so what is going on?  We think that highly innovative companies are different, as are their employees.  Churn is unavoidable, and even necessary, for most organizations. Turnover may be more advantageous for highly innovative companies that seek to benefit from fresh ideas and continuous innovation.  Additionally, employees who are attracted to innovative workplaces may be more likely to seek new challenges and growth opportunities.  These workers are more likely to pursue a broad range of career experiences and skill enhancement opportunities, and they may seek out a new position to achieve these goals.  In sum, highly innovative companies seek new ideas and employees seek new experiences.

The coronavirus pandemic was a catalyst for many companies to become more innovative in the way they serve their customers, but also in how they engage with their employees.  As seen in the figure below, employee perceptions of business innovation increased in 2020 and 2021 before leveling out in 2022.  Perceptions of employer social innovation also made positive strides during the pandemic, increasing steadily between 2019 and 2022.  However, it is troublesome to learn that both business and social innovation decreased in 2023.  Given that innovation not only benefits revenue growth and shareholder value but also increases employee satisfaction and retention, it is important that employers do not become complacent and continue to make innovation a priority.

 

What innovativeness means to employers.  To retain talented employees, employers should track employee perceptions of innovativeness and identify the drivers behind and barrier to these perceptions.  Companies that are viewed as low in business or social innovation could have difficulty satisfying and retaining workers.  Additionally, higher job satisfaction can result in greater productivity, and positive workplace cultures have been linked to increased employee performance.  Companies should evaluate the work environment, including the degree to which employees are challenged and exposed to new roles and skills, the level of bureaucracy, and openness to collaboration and creativity. Companies should also recognize the impact of social innovation, as employees increasingly desire an employer that is contributing to positive change for society and the environment.  Both business and social innovation start at the top, so it is imperative that management is proactive in demonstrating the importance of these priorities through action and messaging.

It is natural in some types of companies and industries for staff to change jobs every few years in search of new opportunities and skills.  However, this turnover results in lost insights, additional hiring and training costs, and potential negative morale impacts.  While it may not be possible (or even desirable) to retain employees forever, companies low in innovation are more likely to experience high churn due to dissatisfaction.  Companies in highly innovative sectors (such as tech firms and start-ups) must ensure they offer an engaging and collaborative environment.  It is also important that potential applicants are aware of companies’ commitment to innovation so that these skilled applicants will consider those companies for their next employment opportunity.

In today’s world, consumers expect more from companies than a satisfactory experience or a cheap price. Likewise, employees are not content with a steady job that offers acceptable pay and benefits.  They also demand an employer that is creative, innovative, pioneering, and committed to benefiting society and the environment.

 

 

[1] National Technology Readiness Survey™ by Illuminas, and the Responsible Business Center at Fordham University, https://rockresearch.com/techqual/

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By Sarah Dellomo, Director of Client Services, Illuminas