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Money Can’t Buy Innovation

Strategy + Business Magazine has published a thorough summary of results from the Global Innovation 1000, an annual study by Booz Allen Hamilton. Now in its second year, the study analyzes the financial performance of companies that spend the most on research & development worldwide. Reinforcing last year’s conclusion, the study found no simple relationship between level of R&D spending and corporate performance. Companies with (relatively) modest R&D budgets can perform as well or better than their billion dollar counterparts. When it comes to innovation, quality is simply more rewarding than quantity.

Among the findings from this year’s study:

Deep pockets don’t matter much. There are no significant statistical relationships between R&D spending and the primary measures of financial performance: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales (gross margin) is the only performance variable with a statistical relationship to R&D spending.

Scale provides one key advantage. For the 500 companies with the greatest revenue, median R&D spending was just 3.5 percent of sales, compared to 7.6 percent for the remaining 500. Despite a lower R&D-to-sales ratio, the financial performance of large companies is statistically indistinguishable from that of smaller, relatively higher-spending firms.

High-leverage innovators are rare. Only 94 of the companies on the Global Innovation 1000 were considered “high-leverage” innovators. These companies outperform their peers in seven key performance measures while spending less on R&D as a percentage of sales than their industry medians.

Patents don’t produce profits. Increased spending on R&D can boost the number of patents controlled by a company, but there is no statistical relationship between the number of patents held by a company and its overall financial performance.

Innovation masters know what counts. High-leverage innovators and overall performance leaders do not distinguish themselves by spending a lot of money. They do so by developing capabilities in ideation, project selection, development and commercialization.

The part of the study I found most intriguing was the list of 94 high-leverage innovators, comprised of very diverse companies, including: Adidas, Apple Computer, Black & Decker, Cadbury Schweppes, Caterpillar, Christian Dior, Dell, eBay, Exxon Mobil, Google, Kellogg, Petro-Canada, Research in Motion, Suncor Energy, Samsung Electronics, Symantec, Toyota Motor, Volvo Group, and Yahoo. In this subset alone, 2005 R&D spending ranged from US$46 million to more than US$7 billion, proving that superior corporate performance can take place at any point on the R&D spending scale.

The lesson: Innovation is not about what you spend, but how you spend it.

Posted by Nelson T. on December 20, 2006 10:28 PM

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