We found that companies place an increased value on innovation, but more spending doesn't necessarily lead to smarter spending or better results
NEW YORK (PRWEB) October 16, 2007
Booz Allen also identified three distinct corporate innovation strategies, but concluded that the most significant performance differences lay not in which innovation strategy was used, but in how tightly it was aligned with overall corporate strategy. Companies that get the greatest return from their R&D investment also attributed much of their success to their focus on customer insight throughout the innovation process. In fact, companies that emphasize direct customer engagement reported three times higher operating income growth, 65% higher total shareholder return, and two times greater return on assets than companies less focused on customer feedback.
Booz Allen analyzed the world's top 1,000 public corporate research and development spenders - the Booz Allen Global Innovation 1000 - in what continues to be the most comprehensive effort to assess the influence of R&D on corporate performance. The study looked at spending on innovation and corporate performance, and uncovered insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth examination of a subset of this year's Global Innovation 1000 companies representing $68 billion in 2006 R&D spending, to better understand the connection between innovation and strategy, and between strategy and the role of the customer across the innovation value chain.
Key findings of the study include:
R&D spending caught up to sales growth in 2006. R&D spending by the Global Innovation 1000 rose last year by $40 billion to $447 billion, a 10% increase. The gain is double the group's five-year compound annual growth rate and an amount more than twice the 2006 Gross Domestic Product of the Republic of Ireland. And for the first time in four years, the ratio of R&D-to-sales leveled off, ending a sustained four-year decline, with R&D spend matching sales growth (which was also 10%)
Companies headquartered in North America increased their absolute R&D spending by 13%, representing the largest source of dollar growth among the Global Innovation 1000. North American headquartered firms sustained their lead in innovation spending, having increased their absolute R&D spending by $21 billion in 2006, as compared with China and India which increased spending by only $400 million during the same period. Companies headquartered in China, India and the rest of the developing world represent just 5% of overall corporate spending on R&D in 2006, but their five-year average growth rate suggests a desire to catch up quickly. China and India grew their 2006 spend by 25.7% over last year, in keeping with a five-year average rate of growth of 25%.
Most companies adopt one of three strategies for effective innovation. Booz Allen identified three distinct corporate innovation strategies, through analysis of a subset of this year's 1,000 top R&D spenders, surveys and follow-up interviews with C-level executives. However, no one of these three strategies consistently outperforms the others:
-- Need Seekers - Actively engage current and potential customers to shape new products, services and processes, and strive to be first-to-market with those products. The DeWalt division of Black & Decker, for example, stresses engagement with customers, and grew its U.S. power tools business from $150 million to more than $2 billion, increasing market share from the teens to 50%. DeWalt's engineers and marketing product managers regularly visit homebuilding job sites to study building trends and their impact on the company's products.
-- Market Readers - Watch their markets carefully, but prefer to maintain a more cautious approach, focusing largely on driving value through incremental change. Plantronics, a maker of headsets and other audio equipment, closely follows technological and user trends in both the commercial and consumer market, creating strategic partnerships with its major corporate customers and relying on a set of strategic filters, such as potential return of investment and sales forecasts, to determine what products to bring to market.
-- Technology Drivers - generate product ideas by deploying their technological skill and relying on unarticulated customer needs for product inspiration, rather than following the market or direct customer input, to drive both breakthrough innovation and incremental change. Siemens, the German engineering and electronics leader, aligns its long-term innovation portfolio around certain megatrends, such as the rise of personalized healthcare.
Companies that more closely align their innovation model with their corporate strategy perform better. Companies that align their corporate and innovation strategies have superior financial performance, with 40% higher operating income growth and twice the shareholder returns over the last three years than companies with strategies that are less well-aligned.
"While there is more than one innovation strategy that can win in the marketplace, it is clear that the key to superior performance lies in linking innovation strategy and corporate strategy - and in focusing on the customer in ways that can best promote strategic success," said Barry Jaruzelski, Vice President at Booz Allen.
More than 11% of companies are High-Leverage Innovators. Compared with others in their industries, 118 of the 1,000 companies studied consistently outperformed their peers over the entire five-year period, while simultaneously spending less on R&D as a percentage of sales than their industry median, marking a more than 25% increase in the number of companies that earned recognition in this category compared to last year.
These High-Leverage Innovators attribute much of their success to their focus on the entire innovation value chain, from generating new ideas, to product development, to marketing. All appeared to work hard to make sure their innovation strategies were closely aligned to overall corporate strategy. And all shared a focus on the customer, and the processes they employed to maintain their customer focus throughout the innovation value chain.
Money alone cannot buy effective innovation. Analysis of the 2006 Global Innovation 1000 again confirms the major finding from our prior studies: there are no statistically significant relationships between R&D spending and the primary measures of financial or corporate success, including sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns.
"We found that companies place an increased value on innovation, but more spending doesn't necessarily lead to smarter spending or better results," said Kevin Dehoff, Booz Allen Vice President. "With increased competition leading to thousands of new products being released every year, companies must improve their innovation processes to succeed."
Effective innovators tightly manage the innovation process. As they execute the four principal elements of innovation: ideation, project selection, product development, and commercialization, every company Booz Allen talked to had a disciplined stage-gate process combined with regular measurement of everything from time and money spent in product development to the success of new products in the market. This, combined with a strong portfolio management program, has allowed these companies to understand better how their innovation engines promote their companies' long-term growth.
Additional study findings include:
-- The top 10 global R&D spenders in 2006 were, in descending order: Toyota, Pfizer, Ford, Johnson & Johnson, DaimlerChrysler, General Motors, Microsoft, GlaxoSmithKline, Siemens and IBM.
-- R&D spending among the Global Innovation 1000 ranges from the $7.7 billion spent by Toyota to the $47 million by Meidensha Corporation, a wide range that explains why the top 100 companies account for fully 64% of the total R&D spend of the Innovation 1000.
-- Sales of the Global Innovation 1000 grew 10% to $11.8 trillion in 2006, maintaining the same overall ratio of R&D spend to sales of 3.8% seen last year and 4.2% in 2004. North American headquartered companies increased their lead in R&D intensity, spending 4.8% of sales on R&D, up from 4.6% last year, while Japanese headquartered companies spent 3.7% of sales and European headquartered companies spent 3.4%.
-- Booz Allen estimates that the Global Innovation 1000 accounts for 84% of 2006 total global corporate R&D spending of $540 billion, and 52% of all global R&D spending of $879 billion, including government and not-for-profit R&D.
-- R&D spending remains highly concentrated in a few large industries. More than two-thirds of the 2006 total was spent in just three industries: Computing & Electronics (29%), Health (22%), and Automotive (17%).
-- Every industry with the exception of Automotive accelerated its pace of R&D spending in 2006, with Health leading the way with five-year average growth of 13%, followed by Software & Internet at 12%. Only the automotive industry spend grew at a slower rate over the last year (1.3%) than its 5 year historic growth rate (4.2%).
-- Global Innovation 1000 companies headquartered in North America, Europe, and Japan account for 95% of total R&D spending in 2006.
Booz Allen Hamilton Global Innovation 1000: Study Methodology
Booz Allen Hamilton identified the 1,000 public companies around the world that spent the most on research and development in 2006 (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 analyzed key financial metrics for each of the top 1,000 companies for 2001 through 2006 -- 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 9 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 and financial performance metrics for each company against the median R&D spending level for that industry.
To understand how innovation strategy affects performance, Booz Allen also surveyed a subset of companies on this year's Global Innovation 1000 list that spent a total of $68 billion on R&D in 2006, the responses to which were analyzed using a variety of statistical methods.
The Global Innovation 1000 study is available online at http://www.boozallen.com.
About Booz Allen Hamilton
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