Achieving R&D Success
Of course, even the best business management cannot overcome poor decisions about which ideas to move into development, or add significantly to value if the idea itself isn’t strong. Thus, the quality of those early ideas, and of the ones pushed past the conversion stage, is critical. To ensure good decision making, executives need to make use of the processes and techniques best suited to their chosen innovation strategy, and put the right people in place to execute on them.
As the business environment becomes ever more competitive, the need to innovate successfully becomes ever more acute. Says Utley of Caterpillar: “There is nothing like a powerful external market force to really drive an intense innovative environment. And there is nothing that drives creative energy like that feeling in the pit of your stomach when you have a goal that you have to achieve and it’s still pretty far away.” Harness that energy as you move forward with your innovation efforts, taking comfort in the fact that your performance during the crucial front end can be much more consistent and manageable than you thought possible.
Profiling the Global Innovation 1000
Worldwide R&D spending among the Global Innovation 1000 increased 9.6 percent in 2011, to US$603 billion. Coming on the heels of last year’s rise in spending, this makes it clear that we have emerged from the latest financial crisis with a stronger commitment to innovation investment than we did after the dot-com meltdown in 2000. In the first three years following that collapse, innovation spending increased at an annual rate of 3.5 percent, compared with 9.5 percent between 2009 and 2011. Yet despite this significant growth, average R&D intensity (innovation spending as a percentage of sales) actually declined one-tenth of 1 percent in 2011, because the Global Innovation 1000 generated sales of a staggering $17.6 trillion last year. (See Exhibit A.)
The top 100 companies accounted for 50 percent of the growth in R&D spending, and now represent 62 percent of the total spent on R&D by the Global Innovation 1000. Overall, three-quarters of companies increased their spending, up from 68 percent in 2010, whereas just 19 percent spent less. The top 20 spenders increased their innovation investments by $5 billion, accounting for just under 13 percent of the overall increase. (See Exhibit B.)
Together, the computing and electronics, healthcare, and auto sectors once again accounted for the majority of overall spending — 65 percent in 2011. (See Exhibit C.) Computing and electronics companies continued their reign as the top R&D spenders, accounting for 28 percent of spending worldwide ($167.2 billion), as well as the largest increase in spending during 2011. The industry increased its spending by $13.4 billion last year. (See Exhibit D.) This investment represents a 7.1 percent increase, and with revenues up just 3.5 percent, the sector’s R&D intensity rose from 6.1 percent to 6.5 percent. Samsung led the way, increasing its R&D spending almost 14 percent, to $9 billion, and raising its ranking to number six in the list of the largest spenders overall. As computing power moves into the cloud and consumers turn to less-expensive devices, sales of traditional electronics products such as PCs and digital cameras are slowing. It’s no surprise, then, that large, incumbent companies like Sony, Hewlett-Packard, and Texas Instruments have increased their R&D intensity in hopes of staying relevant.
Thanks largely to the auto sector’s strong recovery, spending on R&D in this industry increased by 15 percent, to a total of $96.5 billion, which was a far cry from the sector’s 14 percent spending cut in 2009. R&D intensity rose from 3.7 percent in 2010 to 3.8 percent in 2011. After falling to sixth place in the overall rankings in 2010, Toyota increased its spending by 16.5 percent and claimed the top spot. All the auto companies among the top 20 spenders in 2010 either moved up in the rankings or stayed the same in 2011, and Daimler entered the top 20 for the first time. Innovation remains critical for auto companies as they seek to meet ever more stringent fuel economy standards, boost the use of electronics in their cars, develop common platforms around the globe, and attract younger buyers.
Meanwhile, as its increase in absolute spending slowed in 2011, the healthcare industry’s R&D intensity dropped by three-tenths of 1 percent, to 12.2 percent, even though it continues to spend significantly on R&D ($126 billion in 2011). Of the eight healthcare companies in the top 20 spenders in 2010, all but Novartis and Sanofi fell in the rankings in 2011. Given the recent dearth of successful major pharmaceutical product introductions, many healthcare companies are hesitant to continue investing in innovation, choosing instead to steer profits to shareholders. Regulatory uncertainty has also taken its toll: Large pharma companies appear reluctant to invest in R&D without a clearer path to market.
Every region where Global Innovation 1000 companies are headquartered increased spending in 2011, although the results varied considerably. (See Exhibit E.) The biggest absolute gains were in North America, where companies increased spending by 9.7 percent, significantly above their five-year average increase of 7 percent. Similarly, Japan increased spending by 2.4 percent, well above its five-year average increase of 0.2 percent. Europe, however, increased spending by just 5.4 percent, somewhat below its 6.8 percent average increase, likely a result of the region’s continued economic woes.
China and India (grouped together here) increased spending by 27.2 percent in 2011, to a total of $16.3 billion — by far the greatest growth in R&D spending across all regions, albeit from a small base. Because China’s economy is much larger than India’s, and far more of its companies appear in the Global Innovation 1000 (47 companies, compared with just nine from India), China accounted for more than 90 percent of the countries’ combined spending. However, it is worth noting that their combined rate of growth was down from 38.5 percent in 2010, which may reflect the cooling down of the Chinese economy over the past year.
With an increase in spending in nearly every industry and geographic market, investment in R&D among the Global Innovation 1000 is now at an all-time high. Just a few years after the financial crisis gripped the world economy, today it is safe to say that global innovation investment has fully recovered — and is at a higher level than ever.
—B.J., J.L., and R.H.