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Published: November 28, 2007

 
 

The Customer Connection: The Global ­­­Innovation 1000

This process then feeds into Siemens’s vast network of innovation partners, its strategic venture capital efforts, its active mergers and acquisition program, and its Berkeley, Calif.–based Technology-To-Business Center, which Camuti calls “a full-service external technology screening, incubation, and tech transfer/startup operation.” In Camuti’s view, the company maintains its technological edge by balancing customers’ expressed wants with the company’s insights about their future needs, particularly at the business unit level. “Our power-generation business, for instance, uses formal processes to stay in constant contact with customers. That’s why we have successively invested in next-generation gas turbine technology: It improves efficiencies, reduces operating costs, and improves environmental compliance. If you ask those same power-generation customers about solid oxide fuel cells, which are twice the cost of what they’re using today, they’re not demanding that now. So should we stop all research on fuel cells?” The answer, obviously, is no. “What has changed dramatically,” Camuti says, “is the speed of technological change and thus the level at which you listen to the customer. You’ve got to be somewhat skeptical of what they see as the technical solution, and instead depend on your own core set of people who can creatively link new technol­ogy to the future market.”

Tactical Consequences
Is there a best innovation strategy? No. All three of the strategies outlined above can succeed in the marketplace. Is there a best innovation strategy for any given company? Yes. It is the approach that best suits — and is most closely aligned with — the company’s overall corporate strategy and the competitive environment in which the company operates. For instance, the success of Market Readers like Parker Hannifin and Plantronics can be firmly tied to their ability to apply their strongly value-oriented corporate strategy (as defined by clear financial goals) to their R&D decisions.

For DeWalt, technology innovation stems from close observation of its demanding, knowledgeable customers, and breakthrough innovation is more a matter of putting technology to use in new ways than making major new discoveries. Siemens, on the other hand, operates in many different industries, most of them on the cutting edge of technology. Success therefore requires a mix of incremental and breakthrough innovation, with the emphasis on creating new technologies to open up new markets.

The one R&D tactic employed by every company we spoke to was an insistence on managing the innovation process from start to finish as tightly as possible. That included, in every case, a disciplined stage-by-stage approval process combined with regular measurement of every critical factor, from time and money spent in product development to the success of new products in the market. This, combined with a strong portfolio management program, has allowed these companies to understand better how their innovation engines promote their company’s long-term growth.

In the end, the key to innovation success has nothing to do with how much money you spend. It is directly related to the effort expended to align innovation with strategy and your customers, and to manage the entire process with discipline and transparency.

Profiling the 2006 Global Innovation 1000

Research and development spending among the companies studied this year ranges from the nearly $8 billion spent by the Toyota Motor Corporation (#1) to the $47 million spent by Meidensha Corporation (#1,000), a Japanese manufacturer of electronics and power generation equipment. Fully 70 percent of these companies increased their absolute R&D spend in 2006, leading to a 10 percent overall growth rate in R&D spending. The overall ratio of R&D spend to sales leveled off at 3.8 percent, and stopped the trend to lower R&D-to-sales ratios for the first time in four years. (See Exhibit 2.)

The industry-by-industry breakdown remained relatively steady this year. Computing and electronics, health care, and auto companies made up more than two-thirds of the total absolute R&D spend, whereas the software and Internet sector and the health-care sector remained the top spenders in terms of R&D inten­sity — their R&D-to-sales ratios both came in this year at 13.3 percent. The lowest-intensity industries were telecom, at 1.4 percent R&D to sales, and chemicals and energy, at just 1.0 percent. (See Exhibit 3.)

The changes in the rate of growth in absolute spending among the industries tell a rather different story. Exhibit 4 plots each industry in terms of both its year-over-year and its five-year average growth rate; the size of the bubbles represents their total spend. The health-care sector led with a five-year average growth rate of 13 percent, followed closely by software and Internet companies. Growth in R&D spending for the computing and electronics industry was four times its five-year average, and industrials and aerospace and defense grew at more than three times the five-year average. The only industry to fall below its five-year average growth rate was the auto sector, growing at just 1.3 percent this year, compared with its five-year average of 4.2 percent.

Turning to the geographic breakdown of the Global Innovation 1000, companies headquartered in North America, Europe, and Japan continued to account for the vast majority of the group’s total R&D spend — 95 percent this year, the same as in 2005. Much of this year’s growth in spending came from North America–based corporations in particular, which increased spending 13 percent, nearly double the five-year average. That level of growth kept North America–based companies at the top of the list in terms of R&D as a percentage of sales, with an average of 4.8 percent, followed by Japanese companies at 3.7 percent and European companies at 3.4 percent.

China, India, and the rest of the developing world represent a tiny portion of overall corporate spending on R&D — just 5 percent in 2006. But their five-year average growth rates suggest their desire to catch up quickly. China and India grew their 2006 spend by 25.7 percent over the previous year, in keeping with their five-year average rate of growth of 25 percent, whereas the rest of the developing world increased spending by only 0.6 percent, representing a deceleration from their five-year average growth rate of 18 percent. (See Exhibit 5.)

For those who worry about the long-term competitiveness of U.S. corporations, this portrait of the top 1,000 corporate spenders on R&D may seem like encouraging news. China, India, and the rest of the world are increasing their innovation spending rapidly, but they are starting from a tiny base. Looked at another way, companies headquartered in the de­veloping world, including China and India, increased absolute spending in 2006 by $400 million, whereas North America–based companies increased theirs by $21 billion, more than 50 times as much. At that rate, North America will keep its lead in innovation spending for the foreseeable future — the challenge will be to ensure the effectiveness of that investment.

 
 
 
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Resources

  1. Kevin Dehoff and John Loehr, “Innovation Agility,” s+b, Summer 2007: How to follow Toyota’s example without copying its specifics, and create your own versatile product development process. Click here.
  2. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Money Isn’t Everything: The Booz Allen Hamilton Global Innovation 1000,” s+b, Winter 2005, Click here, and “Smart Spenders: The Booz Allen Hamilton Global Innovation 1000,” s+b, Winter 2006, Click here: Predecessors to this year’s study established the importance of quality, not quantity, in innovation investment.
  3. Alexander Kandybin and Martin Kihn, “The Innovator’s Prescription: Raising Your Return on Innovation Investment,” s+b, Summer 2004: Introduces the innovation effectiveness curve, another tool for raising performance throughout the product life cycle. Click here.
  4. W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant (Harvard Business School Press, 2005): Cited by executives interviewed for this article, this book shows how companies can use innovation to lead them to unclaimed “blue oceans” of profits and growth. 
  5. Knowledge @ Wharton and s+b, “How Companies Turn Customers’ Big Ideas into Innovations,” 1/12/05: Practices for customer-conscious product development. Click here.
  6. Eric von Hippel, Democratizing Innovation (MIT Press, 2005): Demonstrates the value of “user-centered innovation” and shows how to incorporate the customer into the innovation process.
  7. For more articles on innovation, sign up for s+b’s RSS feed. Click here.
 
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