Apple's recent earnings announcement last week that revenue was $1.4 billion below expectations, and the drop in iPhone shipments compared to last year was certainly a wakeup call for the company and its investors.

It used to be that whenever you asked "who is the most innovative company in the world?" the answer would be Apple. Almost unanimously. At least since Steve Job's return to Apple in 1997, and before his passing in 2011. That year (2011) was when Forbes published its first "Most Innovative Companies list", and Apple earned the envious 5th place on that list. However, the next year (2012) it dropped 21 positions to 26th place, and in 2013 it dramatically dropped to the 53rd place in that list. When I checked the 2015 list, I couldn't find Apple anywhere in the top 100.

This brings the first question: how does Forbes measure innovation to create this ranking? The answer is: "Forbes uses a complex algorithm to rank companies by what it calls an 'innovation premium,' which is the difference between market capitalization and a net present value of cash flows from existing businesses. The innovation premium also takes into account anticipated growth from the existing businesses within a company." Did Apple simply flat out because it was too big? Apple's 2015 sales were $233 billion. This means that every single person on this planet, from a newborn to the pre baby boomer generation, from the most advanced countries to the worst places on earth, from the top 1% earners to homeless people have spent more than $3 on Apple products (and services) last year. For some people (and countries), $3 is what you need to live for a week. Can Apple grow further? Can the world's population continue to increase demand for its products?

Or is the problem different, and Apple simply lost its innovative edge? This brings the second question: how do companies measure their own innovation levels?

In 2010, the consulting company McKinsey conducted a global survey which claimed that while more than 70% of executives put innovation as one of their top 3 priorities (more than a third of those ranked innovation as the single top priority), only 22% of them had any innovation metrics in place. One of life's (and business') greatest lessons is that you can't improve what you can't (or don't) measure.

There are several different metrics used by different companies. They are not applied consistently, and are mainly aimed at outsiders, as a public-relations figure.

One of those metrics is the number of patents filed (and issued) by the company. However, the quality of patents can vary dramatically, and while some patents protect dramatic innovation, others can protect relatively minor, easy to circumvent ideas. Another metric is the number of ideas (again, unqualified by how novel, useful, or feasible those areas are). Yet another is the mere number of new products, leaving the word "new" somewhat abstract. Other metrics focus on financial metrics, such as the percentage of sales that are reinvested in research and development, of the Balanced Scorecard Institute's RoPDE (Return on Product Development Expense) metric.

Perhaps the most famous metric is 3M's NPVI (New Product Viability Index), which measures the percentage of sales generated by products that did not exist 5 years ago. This metric is problematic for several reasons. First of all, it does not really define what "new product" means. Is the iPhone 6S "new?" It certainly didn't exist 5 years ago. In fact, it didn't exist before its launch in September 2015. But 5 years earlier that iPhone 4 existed. How innovative is the iPhone 6S compared to the iPhone 4? Or even compared to the first iPhone, introduced in 2007? Should you look at the iPhone 6S as an innovative product, and "count" it towards the 3M new product viability index as a product that didn't exist 4 years ago? Or as a product that was incrementally improved over a 9-year period?

The "biggest" steps in Apple innovation since it dropped the word "computers" from its name (actually even before, as the name change only took place in 2007) were the iPod (2001), iPod nano (2005), iPhone (2007), iPad (2010), and Apple Watch (2015). For the most part, the other products were merely incrementally innovative. Until Apple releases the "Apple Car", of course...

The innovation metrics used by companies today do not really reflect a positioning towards a future of innovative products. Time for a new innovation metric?

By the way, the top spot in Forbes' 2015 "World's Most Innovative Companies" list now belongs to Tesla.

Published on: May 4, 2016
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