The American Innovation Index

Why Innovation Matters

The American Innovation Index™ (Aii) team has been talking a lot about the subject of company innovativeness, referencing our learning from benchmarks of 163 U.S. companies. But what is innovation, and why does it matter? In the Aii, “innovation” refers to the degree to which customers of a company find it to be creative, a pioneer in its category, and a market changer. You cannot automatically assume these are good things. The Devil’s advocate would say that innovation is superficial. After all, wouldn’t a consumer care more about desirable products, good service and great value, than about whether a company is creative, changes things around, and shakes up the market?

Fortunately, the Aii captures a lot more data than just measures of innovativeness, allowing us to delve into the correlates and consequences of innovation. Besides two key innovation indexes, general innovation and social innovation, we also quantify customer loyalty, the attractiveness of a company to do business with, the emotions customers experience dealing with a company, and their observations about change (good or bad) observed in the past year. These all fit into a framework developed by our colleagues at the Norwegian School of Economics who demonstrated that change triggers emotions of arousal and pleasure, which drive the perception a company as being innovative, which in turn makes the company more attractive and worthy of loyalty.

Let’s explore the question of why innovation matters with a deep dive into our rich company database. We identified the 10 companies with the highest level of customer loyalty, based on a scientific index that consists of willingness to recommend, say positive things and continue to do business with a company. The list includes a wide range of industries, with the top 3 including Toyota, USAA, and Southwest Airlines. Now, let’s take a look at the American Innovation Index™ rankings of these companies – it turns out that 5 of the 10 companies with the highest loyalty rank in the top 10 for innovativeness (and all but one is in the top 20). Similarly, 5 of these high loyalty companies are among the top 10 on the Social Innovation Index™. The two measures of innovativeness do not always overlap, therefore, 7 out of 10 of the companies with the highest loyalty meet the cut on one or both innovation indexes.

To further explore the relationship, we examined the bottom 10 out of 163 on loyalty. Rather than call them out by name, we can mention that 6 are TV/ISP providers, 2 are airlines, one is a hotel chain and one is a supermarket chain. In this case, 7 of the companies with the lowest loyalty are among the bottom 10 on general innovativeness, and 8 are among the bottom 10 in social innovativeness.

There is clearly a strong relationship between innovativeness, as experienced by customers, and overall loyalty. Loyalty is key to ensuring customers continue to do business with a company, allocate more share of wallet, and provide positive word of mouth. When companies are stagnant in how they do business, customers become disenchanted or bored, and gravitate to more exciting competitors, companies that are creative, innovative, and transformational. In some cases, entire sectors have problems with innovativeness that affects their loyalty. For example, traditional “cable companies” rank at the bottom, and are ripe for disruption by companies like Netflix (#5 on innovativeness, #12 on loyalty). The industry in which a company operates does not have to determine its potential to innovate. For example, the list of the 20 most innovative companies includes two airlines – Southwest (#8) and JetBlue (#13) – but the bottom 20 also includes two airlines. The implication for companies is to examine their innovativeness from the customer perspective, ensuring “upstream” initiatives affect the customer experience, and that customers continually notice change in offerings, delivery, customer care and appearance in the physical and digital space. These changes will pay off in the form of greater loyalty.