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Published: November 30, 2006

 
 

Smart Spenders: The Global Innovation 1000

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.

 
 
 
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Resources

  1. Kevin Dehoff and Vikas Sehgal, “Innovators without Borders,” s+b, Autumn 2006: A study by Booz Allen Hamilton and India’s National Association of Software and Service Companies (NASSCOM) on the expanding geographic footprint of innovation sourcing. Click here.
  2. Yves Doz, Keeley Wilson, Steven Veldhoen, Thomas Goldbrunner, and Georg Altman, “Innovation: Is Global the Way Forward?” A joint study by Booz Allen Hamilton and INSEAD, 2006: Global companies’ current and future innovation and R&D dispersion. Click here.
  3. Jules Duga and Tim Studt, “The State of Global R&D: 2005 Global R&D Report,” R&D Magazine, September 2005: Battelle Institute study shows how government and business R&D spending has spread around the globe.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Money Isn’t Everything: The Booz Allen Hamilton Global Innovation 1000,” s+b, Winter 2005: The first Global Innovation 1000 report. Click here.
  5. Jonathan Schwartz, “The Five Founding Principles That Drive Innovation,” Financial Times, September 12, 2006: Sun Microsystems’ chief executive officer on managing the process of innovation.
  6. Manufacturing Extension Partnership overview, National Institute of Standards and Technology (NIST): Information about NIST’s outreach program for small and medium-sized manufacturers. Click here.
  7. St. Jude Children’s Research Hospital, 2005 Annual Report: Research highlights, plus organizational and financial information. Click here.
  8. The 2006 Patent Scorecard: ipIQ, a technology analysis firm that produces the world’s most comprehensive patent database, from which data was drawn for the Global Innovation 1000 analyses, ranks corporate innovation within 15 industries by patent quality, technological strength, and breadth of impact. Click here.
  9. “The 2005 R&D Scoreboard: The Top 750 U.K. and 1000 Global Companies by R&D,”: This study from the U.K. Department of Trade and Industry provides detailed data and analysis and claims a link between R&D and financial performance that our study did not detect. Click here.
 
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