Here is a brief excerpt from an article written by Vanessa Chan, Marc de Jong, and Vidyadhar Ranade for the McKinsey Quarterly, published by McKinsey & Company. As they explain, a survey finds that when it comes to reallocating R&D expenditures, more isn’t necessarily better. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Mounting evidence finds that the habit of allocating the same levels of resources to the same business units year after year undermines corporate performance—and even lowers the odds of a lengthy tenure for CEOs.1 Put another way, in a fast-changing competitive environment, companies that succumb to resource inertia will probably struggle to meet their strategic goals.

New McKinsey research paints a complementary, though more nuanced, picture for reallocating innovation and R&D resources. Our survey of senior executives at companies with revenues of more than $1 billion showed that the average level of annual R&D reallocation is relatively consistent—12.7 to 13.7 percent—regardless of a company’s innovation performance (see sidebar, “About the survey”). Parsing the data in a finer way to highlight the distribution of reallocation behavior further emphasizes the fact that when it comes to reallocating R&D expenditures, the message is subtler than “more is better.”

Reallocation sweet spots?

As the exhibit shows, top-quartile innovators may be identifying sweet spots where adequate (yet still substantial) levels of R&D reallocation are bolstering innovation performance: 75 percent of executives at top-quartile companies say they reallocated 6 to 30 percent of their R&D budgets in each of the past three years compared with 37 percent of the respondents at bottom-quartile performers.

Annual R&D reallocation, on average, is relatively consistent, yet top-quartile innovators may be identifying sweet spots where reallocation bolsters innovation performance.

Only 5 percent of the top-quartile innovators reallocated more than 30 percent of their R&D budgets each year. By contrast, 16 percent of the bottom-quartile innovators did so, and 9 percent of the bottom-quartile companies reallocated more than 40 percent of their R&D budgets. That’s a big adjustment for any large organization and a threshold none of the top-quartile companies breached.

The poorest performers, in fact, seem divided between two camps. At one extreme, there’s a near-majority of companies that are sleepwalking through their R&D-reallocation decisions, moving 5 percent or less of their R&D resources a year among businesses and divisions. At the other extreme, a second group is placing huge bets in an attempt to jump-start performance or perhaps to make drastic course corrections. Time—and further research—are needed to determine if these low-performing innovators have awakened in time or are in fact doing additional damage through panicky reallocations.

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Here is a direct link to the complete article.

Vanessa Chan is a principal in McKinsey’s Philadelphia office; Marc de Jong is a principal in the Amsterdam office, where Vidyadhar Ranade is an associate principal.

The authors wish to thank Peet van Biljon for his contribution to this article.