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Published: November 29, 2005

 
 

Money Isn’t Everything

At the spending levels represented by the Global Innovation 1000, companies can maximize their return on innovation investment through better processes for ideation, project selection, development, and commercialization. The imperative, then, is to identify the priority areas where process improvements will raise the curve the most.

For Apple in 1996, the issue was portfolio management. After Steve Jobs was reinstated as CEO, he led a massive review of the R&D effort. As a result, Apple cut a large percentage of projects, focused its development resources on the short list of those that had the greatest potential, and started an innovation machine that eventually produced the iMac, iBook, iPod, and iTunes. This record re-earned Apple a reputation as one of the world’s most innovative companies. Yet it had achieved these results by brains rather than budgets. Apple’s 2004 R&D-to-sales ratio of 5.9 percent trails the computer industry average of 7.6 percent, and it was consistently below average in the years we studied (1999 through 2004). Furthermore, the $489 million Apple puts into R&D is not even one-tenth the amount spent by IBM (#9), the top R&D spender in computing and electronics. (This study covers the period before IBM sold its personal computer business to Lenovo.)

Collaboration Is Key
Successful innovation requires an exceptional level of cross-functional cooperation among R&D, marketing, sales, service, and manufacturing. And collaboration failures can have a devastating impact on the success of the innovation process:

• Ideation. Customer insights from marketing, sales, and service teams are essential to identifying attractive opportunities for new products and services.

• Project Selection. Generated by marketing staff, robust estimates of sales and profit potential make it possible for the R&D team to place educated bets on the projects with value propositions most likely to gain marketplace success.

• Development. The marketing team can also provide a deep understanding of customer needs, while manufacturing and suppliers can offer critical suggestions on design for manufacturability and better leverage of resources.

• Commercialization. The product or service can succeed only if all functions — R&D, marketing, manufacturing, sales, and service — are integrated as a team and each function is doing its part to support the value proposition through a seamless launch.

So what’s an organization to do? Based on in-depth observations of real-world innovation practice and our analysis of the Booz Allen Global Innovation 1000, we find that effective innovators do four things well:

1. Align innovation strategy with corporate strategy. It is surprising how often this alignment does not take place. When it does, it gives all functional silos an incentive to support the corporate strategy.

2. Make the right bets. This imperative requires managing not only the portfolio of projects and technologies that will maximize tomorrow’s profits, but also the portfolio of business models the company fields to bring these products or services to market. Any choice of a project to “greenlight” should be evaluated in the context of both customer needs and development costs.

3. Manage the pipeline with speed and efficiency. It is critical to have clear processes both to manage the innovation effort (e.g., program management standards) and to support it (e.g., knowledge management).

4. Recombine your “organizational DNA” to drive results. An organization’s DNA, as defined by a body of recent research at Booz Allen Hamilton and elsewhere, includes its structures and systems, and the degree of alignment of these elements with strategy. Companies should ask themselves: Are incentives in place to reward desired performance? Are governance and decision-making protocols clear and consistent? Does the structure of reporting relationships enable streamlined processes and support the company’s strategy? And are there clear channels for sharing knowledge about innovation and productivity?

 
 
 
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Resources

  1. Joris Beerens, Thomas Goldbrunner, Richard Hauser, and Georg List, “Mastering the Innovation Challenge: Results of the Booz Allen Hamilton European Innovation Survey,” a Booz Allen Hamilton white paper, www.boozallen.com: This 2005 study pinpoints both the ambitious innovation targets that European innovators have set — and their concerns that their organizations may not be up to the challenge.
  2. Henry William Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003): Harvard’s Professor Chesbrough proposes collaborative, transparent innovation practices that deliver improved performance by opening the corporation to outside thinking from vendors, academics, and investors.
  3. Peter Coy with Ben Elgin, Amy Barrett, and Gail Edmondson, “The Search for Tomorrow,” Business Week, October 11, 2004: A new index that examines corporate R&D and capital spending and ranks all U.S. companies in the S&P 500 plus 700 non-U.S. companies on the basis of their R&D and capital investment spending. Click here.
  4. Alexander Kandybin and Martin Kihn, “Raising Your Return on Innovation Investment,” s+b, Summer 2004: Introduces the concept of the innovation effectiveness curve. Click here.
  5. Robert W. Lane, speech given at Northwestern University’s Kellogg School of Management, April 23, 2003: Describes how Deere aligned its innovation strategy with customer priorities. A transcript is available. Transcript available here.
  6. Erick Schonfeld, “Outsourcing Innovation,” Business 2.0 Web site, May 30, 2003: Contains the Larry Huston quote and a description of P&G’s approach. Click here.
  7. Special Report: R&D ’04, MIT Technology Review, December 1, 2004: Ranks the top 150 R&D spenders in 2003 based on an innovation index that takes into account total spend, spending growth, and R&D-to-sales ratio. Click here.
  8. The 2004 R&D Scoreboard: The Top 700 U.K. and 700 International Companies by R&D Investment, Parts I and II, U.K. Department of Trade and Industry: This study provides detailed demographics and claims a link between R&D and sales performance that our study did not detect. Click here.
 
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