Here is a brief excerpt from an article co-authored by Barry Jaruzelski, Volker Staack, and Brad Goehle for strategy+business, published by strategy&, formerly Booz & Company. They share what ten years of research reveal about the best R&D strategies for the decade ahead. To read the complete article, check out others, learn more about the firm, and obtain subscription information, please click here.
Illustration by Harry Campbell
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The success of corporate R&D is on every C-suite agenda. Yet wide disparities persist in how well innovation investments actually pay off. As a consequence, R&D is often seen as a black box, where large sums of money go in and innovative products and services only sometimes come out. One of the aims of the Global Innovation 1000 study, our annual analysis of R&D spending, has been to demystify the process—and to find universal principles that can be applied by any company, in any industry.
This year, the 10th anniversary of the study, we looked back at a decade’s worth of research on R&D spending patterns and surveys of innovation executives, plus anecdotal insights about how companies have been improving their innovation performance. We also surveyed more than 500 innovation leaders in companies large and small, across every major region and industry sector, to ask what they have learned in the last 10 years about why some investments work and others do not. We found that it’s really not that mysterious: Over the years, we’ve identified the core strategies that can improve a company’s return on its R&D investment, and we’ve witnessed some consensus around the key success factors that drive results. For example, one of the main messages we heard is that innovation leaders feel they have made real progress in better leveraging their R&D investments, particularly by more tightly aligning their innovation and business strategies, and by gaining better insights into customers’ stated and unstated needs. And in fact, 44 percent of our 2014 survey respondents say that their companies are better innovators today than they were a decade ago, while another 32 percent say they are much better. Only 6 percent say they are doing worse.
For our 2014 study, we also looked ahead to the next decade, asking our survey respondents how they expect their innovation practices to evolve. We found tremendous opportunities for improvement: Only 27 percent feel they have mastered the elements they will need for innovation success over the next 10 years. Gaining that expertise will be important as companies’ innovation goals change in the future. Many of our respondents said their companies plan to shift their R&D spending mix over the next decade—from incremental innovation to new and breakthrough innovation, and from product R&D to service R&D.
Our study also provides some insight into trends in R&D spending during the last decade. The rate of growth in innovation expenditures for the Global Innovation 1000 slowed sharply in 2014, to just 1.4 percent—the slowest rate of growth in the past 10 years for the 1,000 global companies that spent the most on R&D. (R&D spending declined only once during this time period: in 2010, in the wake of the financial crisis and recession, and then only modestly.)
The last two years of decelerating growth—3.8 percent growth in 2013 and 1.4 percent in 2014—could be attributed to the general mood of uncertainty overhanging today’s global economy or the unusual amount of geopolitical turmoil in the world. Looking at 10 years of data, however, suggests another, simpler explanation: reversion to the mean. The slowdown followed two years of above-average growth in 2011 (10.3 percent) and 2012 (9.7 percent), and R&D spending growth will likely move closer over time to the average 5.5 percent compound annual growth rate from 2005 to 2014. It also may be that innovation spending slows about five years after a market disruption. After all, the next-lowest year of R&D spending growth was in 2006, five years after the 2001 dot-com bubble burst (see Exhibit 1).
Another possible explanation for the slowdown in R&D spending growth is that companies, over time, have been learning to do more with less. The long-term rate of R&D intensity (innovation spending as a percentage of revenues), for example, has declined over the last decade at a compound average rate of 2 percent per year. This also reflects one of the major findings of our Global Innovation 1000 research, which has been reaffirmed in each of the last 10 years: There is no statistically significant relationship between sustained financial performance and R&D spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Our inaugural study, in 2005, “Money Isn’t Everything,” found that R&D spending levels have no apparent impact on sales growth, gross profit, enterprise profit, market capitalization, or shareholder return. Since then, we have conducted more than 10,000 statistical analyses of the relationship of research and development spending to corporate success, which have all led to the same conclusion. The only exception is when companies’ R&D spending falls into the bottom decile compared with their peers’ spending, which does compromise performance.
One explanation for the slowdown in R&D spending growth is that companies have been learning to do more with less.
Mr. Innovation himself, the late Steve Jobs, put it more pointedly in Fortune magazine in 1998: “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”
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Here is a direct link to the complete article and the 2014 report.