Why are some companies able to consistently conceive of, create, and bring to market innovative and profitable new products and services while so many others struggle? It isn’t the amount of money they spend on research and development. After all, our annual Global Innovation 1000 study has shown time and again that there is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.
What matters instead is the particular combination of talent, knowledge, team structures, tools, and processes — the capabilities — that successful companies put together to enable their innovation efforts, and thus create products and services they can successfully take to market. This year’s edition of the Global Innovation 1000, our sixth, analyzes the capabilities systems that the most successful innovators have assembled to execute their distinct innovation strategies, and the ways they have aligned those capabilities with their overall business strategies. Innovators that have achieved this state of coherence, we have found, consistently and significantly outperform their rivals on several financial measures.
We believe that this assessment of key innovation capabilities comes at a particularly opportune time. This year, for the first time in the more than a decade we have been tracking global R&D spending, total corporate R&D spending among the Global Innovation 1000 declined, from US$521 billion in 2008 to $503 billion in 2009, or 3.5 percent. (See “Profiling the 2009 Global Innovation 1000,” below.) Clearly, the global recession, which had not yet taken its toll on the world of innovation in 2008, finally came home to roost last year. Yet that decline makes it even more imperative that companies spend their available R&D dollars wisely. Our goal this year is to examine the capabilities needed to maximize the impact of a company’s innovation efforts in good times and bad, and to highlight the benefits both of focusing on the short list of capabilities that generate differential advantage, and of clearly linking the specific decisions within innovation to the company’s overall capabilities system and strategy.
Strategies and Capabilities
Three years ago, in 2007, we focused our annual innovation study on how companies use distinct innovation strategies to create their products and take them to market. Nearly every company, we found, followed one of three fundamental innovation strategies:
Need Seekers actively and directly engage current and potential customers to shape new products and services based on superior end-user understanding, and strive to be the first to market with those new offerings.
Market Readers watch their customers and competitors carefully, focusing largely on creating value through incremental change and by capitalizing on proven market trends.
Technology Drivers follow the direction suggested by their technological capabilities, leveraging their investment in research and development to drive both breakthrough innovation and incremental change, often seeking to solve the unarticulated needs of their customers via new technology.
It is important to note that we found that none of these three strategies were any better than the others at producing sustained superior financial results, although of course individual companies outperform others within each strategic group. The success of each of the strategies depends on how closely companies, in pursuing innovation, align their innovation strategy with their business strategy and how much effort they devote to directly understanding the needs of end-users.
This year we set out to answer two new questions: Which sets of capabilities are the most critical for the success of each of the three strategies? And do companies that focus on those critical capabilities see improved overall financial results? Our hypothesis: Companies that can craft a tightly focused set of innovation capabilities in line with their particular innovation strategy — and then align them with other enterprise-wide capabilities and their overall business strategy — will get a better return on the resources they invest in innovation.