Smart R&D Spenders

Booz Allen Hamilton?s annual study of the world?s 1,000 largest corporate R&D budgets uncovers a small group of high-leverage innovators who outperform their industries.

A select group of the world?s 1,000 largest corporate R&D spenders perform significantly better than their competitors over a sustained period while spending less on R&D than their industry rivals, according to management consulting firm Booz Allen Hamilton?s second annual global innovation study. 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. However, 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.

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 Barry Jaruzelski, a Vice President at Booz Allen. ?There?s no silver bullet, and just throwing money at the problem is not the answer.?

Booz Allen analyzed the world?s top 1,000 corporate research and development spenders ? the Booz Allen Global Innovation 1,000 ? in an effort 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 organizations 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 analyzed 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.
• 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.
• Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from BAH?s 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.
• 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 suggest there?s no consensus on the right level of innovation investment, since companies are using a range of different innovation business models.
• 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 commercialization. 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.

Innovation Value Chain– Source: Booz Allen Hamilton Global Innovation 1000

?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 Kevin Dehoff, Vice President at Booz Allen. ?The most effective innovation is often not the most expensive.?

Additional study findings include:

• The Global Innovation 1000 companies spent a total of $407 billion on research and development in 2005, up 6% from 2004 ? an amount larger than the combined Gross Domestic Product of Denmark and Norway and roughly equivalent to the budget of the U.S. Department of Defense.
• Global R&D spending is highly concentrated among the top 1,000. The next 1,000 companies spent a total of a mere $25 billion in 2005. Booz Allen estimates that the Global Innovation 1000 accounts for about 85% of total global corporate R&D spending, and 55% of all R&D spending, including government and not-for-profit R&D.
• The top 10 global R&D spenders in 2005 were, in descending order: Ford, Pfizer, Toyota, Daimler Chrysler, General Motors, Siemens, Johnson & Johnson, Microsoft, IBM, and GlaxoSmithKline.
• R&D spending is highly concentrated in just a few large industries. Nearly two-thirds of the 2005 total was spent in just three industries: computing and electronics (26%), health (22%), and automotive (17%).
• The proportion of R&D spending by Innovation 1000 companies outside the traditional leaders of Europe, North America and Japan increased by nearly 60% in 2005, to 4.6% of the total for the world?s top 1,000 corporate R&D spenders.

Source

Download “Smart Spenders: The Global Innovation 1000” (PDF file, 59 pages, 290KB)