When Philip A. Marineau was named CEO of the San Francisco–based company in late 1999, he offered up a one-word solution: innovation. Mr. Marineau was a vaunted “idea guy”; as head of PepsiCo Inc.’s North American business, he had championed the launch of Pepsi One cola, a product that revitalized Pepsi’s lackluster diet segment. At Levi’s, he wasted no time in dispatching designers to Europe and Asia to troll plazas and pachinko parlors for ideas. Spending on new product development increased, and a stream of new products began to roll off the apparel company’s assembly line — Type 1 Jeans, Engineered Jeans, and the Dockers Mobile Pant, which sported pockets for cellular telephones, pagers, and PDAs.
A success story? Not quite: The new jeans, although popular overseas, never caught on in the U.S., and the Dockers Mobile Pant didn’t mobilize consumers. Levi’s announced a net loss of $40 million for the first half of 2003, and global sales fell to $1.8 billion.
Levi’s is not alone. Academic and popular sources have been filling the business world with paeans to innovation. They have championed the search for the “new new thing,” recommended the hiring of “cool hunters” who can uncover big profitable ideas, and suggested that companies can spend their way to novelty-premised growth. Charles I. Jones of Stanford University and John C. Williams of the Federal Reserve Bank of San Francisco argued in 1997, for example, that the “right level” of R&D spending by U.S. companies to ensure consistent levels of growth is “more than four times larger than actual spending.” And a 2001 special report in Business Week opined that “with the rate of return on R&D so high … the country should be spending a lot more.”
Yet time and again, companies have found that spending more on innovation does not necessarily translate into accelerating sales, share, or profits. In 1995, Polaroid began pumping money into R&D in the core imaging business and significantly increased new product launches, but it was not enough to keep the company out of Chapter 11 in 2001. Maytag began making increases in R&D in 2001, yet through 2003 sales continued to slip.
Aggregate statistics support the anecdotal findings. Over the past decade, the number of new consumer products introduced in the United States has grown at a compound annual rate of about 7 percent, to 32,000 a year, according to the research group Productscan Online, while sales have grown only about 3 percent. Christoph-Friedrich von Braun, in his 1997 study The Innovation War, analyzed 30 Global 500 firms and found almost no correlation between increased R&D spending and improvement in profitability. Our own analysis of global personal-care and consumer health-care companies showed no clear correlation between R&D spending as a percentage of sales and growth in revenues or profitability.
Profitable innovation, in other words, cannot be bought. Simply spending more usually leads to a waste of resources on increasingly marginal projects. The solution to innovation anemia is not to boost incremental spending, but to raise the effectiveness of base spending — to increase the return on innovation investment, lifting the firm’s “ROI2.”