Data Point

Study: Who Gets the Most for the R&D Buck?

Want to reap more rewards from R&D spending? Think strategic alignment and customer focus.

October 17, 2007 — CIO — A reality check, of a sort, for CIOs pressing to increase their R&D budgets: A study by consultancy Booz Allen Hamilton finds no significant correlation between the amount of money companies spend on innovation and their financial performance. What gives companies the biggest bang for their R&D dollars? Alignment between an organization's innovation activities and its corporate strategy, along with a deep understanding of customer needs.

Among "high-leverage innovators" (companies that consistently perform better than their industry peers while spending less on R&D,) the annual Global Innovation 1000 study suggests that relying on emerging technology to fuel innovation is riskier than applying proven technologies to an identifiable customer need.

The top innovators still spend plenty. And they're mostly spending more than they did a year ago. The study examined the 1,000 public companies globally who spent the most on R&D in 2006. Toyota took the top slot, with $7.7 billion; that's 9.6 percent more than it spent in 2005. Pharmaceutical-maker Pfizer was next, with $7.6 billion (a 4.7 percent jump), followed by Ford, with $7.2 billion (a 10 percent decline). Overall, R&D spending increased 10 percent in just a year.

Among industries, computing and electronics companies spent the most ($127.4 billion), followed by health care ($97.8 billion) and automotive companies ($74 billion). The companies were primarily in 9 industries which make products, rather than provide services.

Among all 1,000 companies, the "high-leverage innovators" group accounted for an estimated 84 percent of corporate R&D expenditures.

Booz Allen Hamilton researchers further surveyed a subset of the 1,000 companies about their innovation strategies. They found three common profiles.

Need Seekers: These companies engage customers actively in order to be first to market with breakthrough products.

Market Readers: More cautious than need seekers, these companies think of themselves as fast followers and focus on incremental product innovation.

Technology Drivers: Companies which emphasize their technological skills and ability to anticipate unarticulated customer needs.

None of these three models proved inherently better when correlated with a set of 40 performance metrics, according to Barry Jarulzelski, Booz Allen Hamilton vice president and lead marketing officer and an author of the study. But the "technology drivers" companies (across industries) experienced more widely varied returns on assets, making this strategy somewhat riskier.

No matter what model your company follows, IT plays a significant role in successful innovation efforts, Jarulzelski says.

"We've seen high-leverage innovators, having a rigorous disciplined, managed and measured process no matter what strategy they're following. IT tools are relevant in all cases."