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The study found that although R&D spending of these 1,000 companies rose last year by more than $20 billion, money simply can’t buy effective innovation. A group of 94 “high-leverage innovators” including Toyota, Apple, Christian Dior, Google and Caterpillar spend less than their competitors on research and development, yet consistently outperform their industry rivals across a broad set of performance measures. Booz Allen analysed the world’s top 1,000 corporate research and development spenders – the Booz Allen Global Innovation 1,000 – in what continues to be the most comprehensive effort to date to assess the influence of R&D on corporate performance. The study identified the linkages between spending on innovation and corporate performance, and uncovered insights into how organisations can get the greatest return on their innovation investment. Key findings of the study include:
Less than 10% of companies are High-Leverage Innovators This year’s study analysed financial data for the Global Innovation 1000 using a basket of seven performance measures from 2000 through 2005. Compared with others in their industries, only 94 of the 1,000 companies studied consistently outperformed their peers over the entire five-year period, while spending less on R&D as a percentage of sales than their industry median.
These High-Leverage Innovators use many different models and approaches to outperform their competitors, but are generally noted for their distinctive skill in at least one element of the innovation process and are adept across all of the stages. Google, for example, is known for generating new ideas with blistering speed. Toyota excels at developing its products and processes far more efficiently and effectively than most other companies. And Apple is noted for its well-honed capabilities in project selection and customer understanding. The full list of 94 “High-Leverage Innovators” is below.
“Innovation can lead to higher performance, but the process isn’t automatic and it does not necessarily require above average levels of investment. The most successful companies combine an integrated process and a supportive culture to create a sustainable competitive advantage,” said John Potter, a Vice President at Booz Allen. “There’s no silver bullet, and just throwing money at the problem is not the answer.”
Effective innovators excel at four key elements The high-leverage innovators distinguish themselves not by the money they spend, but by building strong capabilities in the four principal elements of innovation: ideation, project selection, product development, and commercialisation. High-leverage innovators listen closely to their customers across the entire innovation cycle. Companies such as Stryker and Black & Decker design their innovation strategy around a keen understanding of their end customers’ needs.
“Our research found that most companies can achieve a greater return on their R&D spending if they view innovation as an end-to-end process that begins with a new idea and ends with a satisfied customer,” said John Potter, Vice President at Booz Allen. “The most effective innovation is often not the most expensive.”
Companies are getting better at squeezing benefits from their R&D spending Although R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, revenues rose at an even faster rate. Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40% of the companies actually increased their spending rate in 2005.
Money simply cannot buy effective innovation Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalisation growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.
Bigger can be better. Scale provides advantages to R&D spenders. For the largest 500 companies, median R&D spending was only 3.5% of sales in 2005, compared with 7.6% for the 500 smallest firms.
Patents generally don’t drive profits Boosting R&D spending can increase the number of patents that a company creates, but there is no statistical relationship between the number or even the quality of patents and overall corporate financial performance.
One size does not fit all R&D budget levels vary substantially, even within industries, which suggests there’s no consensus on the right level of innovation investment, since companies are using a range of different innovation business models.
Additional study findings include:
High Leverage Innovators
Booz Allen Hamilton Global Innovation 1,000: Study Methodology
Booz Allen Hamilton identified the 1,000 public companies around the world that spent the most on research and development in 2005 (companies for which public data on R&D spending was available). Subsidiaries that were more than 50% owned by a single corporate parent were excluded because their financial results were included in the parent company’s reports.
Booz Allen analysed key financial metrics for each of the top 1,000 companies for 2000 through 2005 — sales, gross profit, operating profit, net profit, historical R&D expenditures, and market capitalization. In addition, total shareholder return was computed and adjusted for each company’s corresponding local market total shareholder return.
Each company was coded into one of 10 industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations according to reported headquarters locations for each company. To enable meaningful comparisons across industries on R&D spending levels, Booz Allen indexed the R&D spending level for each company against the median R&D spending level for that industry. A similar approach was employed for financial metrics. Approximately 10,000 analyses were required to explore all combinations of timing lags, regions, performance variables, and industries.
About Booz Allen Hamilton
Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for more than 90 years. Providing consulting services in strategy, operations, organisation and change, and information technology, Booz Allen is the one firm that helps clients solve their toughest problems, working by their side to help them achieve their missions. Booz Allen is committed to delivering results that endure.
With 18,000 employees on six continents, the firm generates annual sales that exceed $3.7 billion. Booz Allen has been recognized as a consultant and an employer of choice. In 2005 and in 2006, Fortune magazine named Booz Allen one of “The 100 Best Companies to Work For”. To learn more about the firm, visit the Booz Allen Web site at www.boozallen.com. To learn more about the best ideas in business, visit www.strategy-business.com, the Web site for strategy+business, a quarterly journal sponsored by Booz Allen. © Copyright 2007 by Finfacts.com |
