Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 67

Return on Investment (ROI) for Innovative Companies A survey by BusinessWeek and the Boston Consulting Group identified the world’s 25 most innovative companies, looking at three dimensions of innovation: process innovation, product innovation, and business model innovation. The top-five companies were Apple, Google, 3M, Toyota, and Microsoft. The top-25 companies were great performers over the 10-year period 1995-2005. The 25 companies had an average return on sales of 3.4 percent in comparison to 0.40 percent for the Standard&Poor’s 1200 Global Stock Index. The top 25 stock returns, based on increase in stock price and dividends over this 10-year period, averaged a 14.3 percent annual return, in contrast to the 11.1 percent return for the S&P Global 1200. These companies are surpassing the Global 1200 companies in part because of superior innovation.

Required What are the issues to consider in calculating the return on investment (ROI), residual income (RI), and EVA® for a highly innovative company?

Step 1 of 4

The formula for calculating residual return RI is as follows: