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 / Winter 2005 / Issue 41(originally published by Booz & Company)


Money Isn’t Everything

As a result of their choices on these dimensions, different organizations have different organizational DNA profiles. There is a clear link between a corporation’s organizational DNA profile and its performance results from innovation: Organizations with healthy profiles significantly outperformed those with dysfunctional ones.

Within the Global Innovation 1000, companies that performed consistently well on at least six of the seven indexed performance measures we studied tended to have practices in place consistent with the four steps outlined above.

John Deere (#44), for example, delivered superior results by (1) aligning its strategy and incentives across all functions using shareholder value added (SVA, a set of cascading metrics and incentives used by Deere executives to tie decision-making behavior to the drivers of shareholder value), (2) enhancing portfolio planning by including customers and suppliers throughout the planning and design process, and (3) improving speed and decreasing product costs through the adoption of lean techniques. CEO Robert Lane, in a speech at the Kellogg School of Management in April 2003, commented on the value of listening to customers: “Too often we were leading customers, providing them with products and features they didn’t want to pay for.… It was an expensive way to conduct business.”

Samsung (#17), another top performer, has moved from innovation also-ran to leader in the last decade. Samsung’s executives are careful with the bets they make, entering only markets in which they have a chance to become dominant — and they are just as rigorous in managing their project portfolio. Organizationally, because they saw design as a major differentiator, they added a chief design officer to ensure that designers and engineers work together to deliver what the customer wants. And Samsung manages its pipeline with great efficiency: For example, from 2000 to 2002, the company increased its number of new product introductions by 67 percent (to 30,000) without increasing the number of parts required.

Beyond Conventional Wisdom
These companies, and similar top performers, recognize that the stakes are too high to leave results purely to chance. For others, the findings of the Booz Allen Hamilton Global Innovation 1000 should be a wake-up call. Investments in R&D may lead to prestige, or may have other benefits, but for most corporations, the primary benefit must be to shareholders. Regulated monopolies can sometimes justify excess innovation investment as part of their implicit or explicit bargain with government overseers, as AT&T did with Bell Labs. Such organizations are creating a national benefit, for example, increasing the pool of technically trained people or building out strategically important infrastructure that can lead to investment, jobs, and a sharpening of the nation’s competitive edge.

But for corporations competing in the free market, excess or ineffective spending is a drain on shareholder returns that saps the resources available for future innovation. Leaders of those companies should ask themselves the question, Are we focusing on the right projects and pursuing them with adequate resources and admirable efficiency?

As Larry Huston, the vice president of innovation and knowledge at Procter & Gamble (#51), noted in 2003 in Business 2.0: “A lot of R&D in America is not sustainable.… The rate of increase of R&D spending is going up faster than the rate of increase in sales.”

For policymakers, the Global Innovation 1000 findings raise different questions. If R&D spending is no guarantee of competitiveness, what metrics provide the best guide to future success? Is there an effective role for government in promoting innovation best practices?

From any perspective, the conventional wisdom has been exposed as false. There is no easy way to achieve sustained innovation success — you can’t spend your way to prosperity. If you’re a corporate leader, it’s time to roll up your sleeves, open the innovation black box, and start retooling the works. The future viability of your enterprise depends on it.

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  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, 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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