Is Tesla really the world’s most innovative company?

By on August 26, 2015

by Adam Gale 

Elon Musk’s electric car company tops a global list, but measuring innovation is fraught with difficulties.

Few companies want to be thought of as ambling blindly down the inevitable path to obsolescence, which is no doubt why so many of them proudly declare innovation to be one of their ‘core values’. As with most good things, someone eventually comes up with a way of measuring it and thus follows the dreaded ranking.

Super-cool electric car firm, Tesla, came out top in Forbes’ list of the World’s Most Innovative Companies 2015. It led the pack of mostly pharmaceutical and tech firms, including British chipmaker ARM Holdings that ranked fifth.

But how does one measure innovation, one might ask? The Forbes list uses a methodology from disruptive innovation researchers Jeff Dyer and Hal Gregersen, which compares the enterprise value of a business (market capitalisation plus debt) with a short-term projection of its revenues based on analysts’ predictions. The greater the relative difference, the more innovative a company is.

The idea is that, using the wisdom of the crowd, investors pay a premium for the future growth of a firm, and that the primary driver of that future growth will be innovation. In other words, they value a business more highly due to an educated hunch that the company will continue to come up with profitable new growth.

That makes sense in broad terms, especially as the study tries to factor out higher growth due to economic development and only includes big firms leveling the playing field.

However, like a lot of research, it needs to be taken with a pinch of salt.

Because the current value of a firm in the research is based on analysts’ projections for the next few years (which accounts for most of the current projects in development at a consumer electronics firm, for instance), the innovation premium must be based on investors’ belief that the firm will continue to grow even further forward in the future.

That belief is based less on the hard data of the business and its development pipeline and more on faith. It is fundamentally a guess, a calculated risk based on past and present performance – Amazon did it before and will do it again. When looking more than a couple of years into the future, investors are as blind as the rest of us, wisdom of the crowd or no.

Of course, betting on Elon Musk’s Tesla or Jeff Bezos’ Amazon to be innovative and still growing in seven or eight years’ time is pretty smart – those firms have innovated successfully before and do spend a lot of money innovating now.

But investors are far too often wrong for their estimation to be used to declare one firm more innovative than the other, or the most innovative in the world. What this study says is that Tesla is considered the most innovative, which is something entirely different. We may like making lists, but like greatness, innovation can only really be measured after the event.

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