High-leverage innovators generally favor flatter and nimbler management structures that make the innovation process more transparent to the executive team. Black & Decker keeps costs down partly by keeping R&D focused and closely aligned with its business units. Although worldwide design is coordinated from headquarters in Towson, Md., Black & Decker maintains no centralized R&D function.
Nor does Stryker. “All R&D activities are managed in our divisions,” says J. Patrick Anderson, vice president for strategy and communications at the medical technology company. “This allows us to target our R&D efforts to meet specific customer needs versus doing a great deal of early-stage, academic research.”
But decentralization is not a universal prerequisite for high-leverage innovation. Some high-leverage innovators manage the innovation value chain from the core, with an integrated company-wide strategy for ideation, development, selection, and commercialization. The SanDisk Corporation, the world leader in the super-hot market for flash memory and data storage cards, makes broad innovation investments at the core technology level to protect its position as a market leader. Its innovation program starts with ownership of key intellectual property. The company owns a patented flash memory technology that enables it to increase memory capacity on its chips, which provides a cost advantage to SanDisk and others who license the technology.
In the flash memory industry, prices fall 40 to 50 percent per year. Thus, at SanDisk, a small team of senior executives meets twice per week to monitor prices and market trends. Their awareness, fed back into the company’s innovation process, allows SanDisk to act quickly on new opportunities. In 2004, for example, the company realized that falling costs had created an opportunity for it to enter the market for MP3 audio players with a flash memory–based device. Management contacted an original equipment maker, defined design specifications, and delivered the new product to retailers’ shelves within six months. The SanDisk player is now number two in the market, after Apple. “We don’t have big planning and product committees,” says SanDisk Chief Financial Officer Judy Bruner. “Most decisions, even those involving huge capital commitments, are made pretty quickly by a small number of pretty visionary people.”
One factor helping SanDisk’s innovation efforts translate to bottom-line performance is the company’s frugal management culture. “We operate in a very lean way across the board,” says Ms. Bruner. In addition to holding R&D expenditures below the level of rivals’, SanDisk’s selling, general, and administrative (SG&A) spend is about 8 to 10 percent of revenue — much less than that of its key competitors.
Symantec, whose brands include the Norton line of security software and Veritas data storage and backup software, keeps its internal innovation engine running efficiently through a core engineering team that designs and develops a variety of product lines. “We have a large portfolio of products and business units,” says Ann Marie Beasley, vice president of strategy. “One of the key contributors to our R&D bang for the buck is that there’s a lot of common engineering and design, as well as actual code reuse.”
Symantec applies the same high-leverage logic to its acquisitions; it has made more than two dozen acquisitions in recent years, generally of leading innovators in adjacent markets that can complement the company’s distinctive position. Two years ago, according to Ms. Beasley, Symantec’s executive team became convinced that stand-alone security software products would become less viable as the industry consolidated and security and storage solutions converged. They concluded they needed a broader portfolio of products to compete. The result, completed in July 2005, was the company’s $13.5 billion acquisition of Veritas.
Corporate executives contemplating their R&D budgets in light of our Global Innovation 1000 study may recall John Wanamaker’s famous quip about advertising. He knew that half the money he spent was wasted; he just didn’t know which half. R&D spending can seem equally mysterious.