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 / Winter 2009 / Issue 57(originally published by Booz & Company)


Profits Down, Spending Steady: The Global Innovation 1000

In response, the company has pulled all the internal levers it can, cutting back on controllable expenditures, paring down low-priority projects, and focusing more on its most significant customers. Ultimately, however, that won’t be enough, says innovation leader Stork. Under these circumstances, survival is more a matter of the economics of competition. “R&D is not only a function of revenue but also of what your competitors do,” he says, “and that changes how you look at the metrics that relate to innovation ROI [return on investment]. How large is the market? What market share do you have today? What growth is there in the market itself? How is your competitor positioned? Do you have a chance to grow there? All of the strong players in this recession are looking over their shoulders at what the other guys are doing.”

Few companies face Applied Materials’ combination of extreme pressure to innovate and significantly declining revenues. So the company’s decision to diversify into other businesses, most notably solar panels, is especially fortuitous. Doing so, Stork notes, allows Applied Materials to transfer its R&D expertise in silicon to other technologies with similar requirements. That kind of thinking is critical in an economic environment that rewards getting that slight extra boost from your R&D efforts.

The Downturn’s Upside
Judging from the data in this year’s study, the results of our survey, and our conversations with executives, the recession’s effect on innovation activity has not been as severe as some observers of the business scene might have anticipated. Innovation has become central to every company’s efforts to compete, and the degree of competition has been in no sense reduced by the downturn; if anything, it has been heightened. Long product development cycles have forced companies to maintain their R&D spending even when revenues decline. And most companies are fully aware of the need to be in position to profit from the coming upturn.

In many ways, the recession has forced the corporate sector to improve its approach to innovation. Virtually all the companies we contacted noted that they have learned to streamline R&D processes, to make sure their product development filters more effectively reflect economic reality, to make smart bets on advantaged technologies, and to kill weak projects more quickly. All these changes should help them get more from their R&D investments over time.

As we head into a better business environment, smart companies will see this recession as a learning experience. Every company should take the time to assess the strengths and weaknesses of its innovation systems and processes. The downturn no doubt revealed some major gaps in innovation capabilities. Fix them now. Doing so right away will pay dividends in terms of speed-to-market, quality of execution, and capacity — both in the coming upturn and well into the future.

Booz & Company Global Innovation 1000: Methodology

Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2008. To be included, companies had to make data on their R&D spending public; all data is based on the last full-year data reported by June 30, 2009. Subsidiaries more than 50 percent owned by a single corporate parent were excluded because their financial results are included in the parent company’s reporting. This is the same core approach we have used in the previous four years of the study.

For each of the top 1,000 companies, we obtained key financial metrics for 2001 through 2008, including sales, gross profit, operating profit, net profit, R&D expenditures, and market capitalization. All foreign currency sales and R&D expenditure figures through 2008 were translated into U.S. dollars at the average exchange rate for the respective year. In addition, total shareholder return was gathered and adjusted for each company’s corresponding local market. Exchange rate fluctuations in the list itself may affect comparison with prior years’ studies.

Each company was coded into one of nine industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations as determined by each company’s reported headquarters location. To enable meaningful comparisons across industries, we indexed the R&D spending levels and financial performance metrics of each company against its industry group’s median values.

To understand more about the impact of the recent economic downturn on innovation spending and strategy, we also conducted a Web-based survey of more than 290 senior managers and R&D professionals from 230 different companies around the globe. The companies participating represented more than US$230 billion in R&D spending, or 44 percent of the total Global Innovation 1000 R&D spending for 2008. Respondents came from all the industry sectors; geographically, 49 percent came from North America, 38 percent from Europe, 13 percent from Asia, and less than 1 percent from the rest of the world.

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  1. Barry Jaruzelski and Richard Holman, “Innovating through the Downturn: A Memo to the Chief Innovation Officer,” (PDF) Booz & Company white paper, March 2009: How companies can tailor their product and technology initiatives to new market realities and refocus their investments on their core R&D and innovation capabilities.
  2. Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000,” s+b, Winter 2008: Last year’s study revealed, for the first time, how R&D money is benefiting most parts of the world.
  3. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: This study, identifying two primary success factors in innovation strategy: aligning the innovation model to corporate strategy and listening to customers every step of the way.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: This study, uncovering a small group of high-leverage innovators who outperform their industries.
  5. Zia Kahn and Jon Katzenbach, “Are You Killing Enough Ideas?s+b, Autumn 2009: How companies can improve their innovation performance by getting their formal and informal organizations in sync.
  6. Alex Kandybin, “Which Innovation Efforts Will Pay,” MIT Sloan Management Review, September 25, 2009: How companies can use an incisive analytic tool to gauge their overall R&D effectiveness.
  7. Paolo Pigorini, Vinay Couto, Ariel Fleichman, and Carlos Gondim, “Reshaping Your Company Business Model: Building for the Future During the Downturn,” (PDF) Booz & Company white paper, June 2009: How to best implement long-lasting and effective initiatives aimed at fundamentally improving the way companies operate.
  8. C.K. Prahalad, “The Innovation Sandbox,” s+b, Autumn 2006: To create an impossibly low-cost, high-quality new business model, start by cultivating constraints.
  9. For more thought leadership on this topic, see the s+b website at:
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