Innovation capabilities enable companies to perform specific functions at all the stages of the R&D value chain — ideation, project selection, product development, and commercialization. We asked respondents to this year’s Global Innovation 1000 survey to identify which capabilities were most important in achieving success at innovation. (See Exhibit 1.) Then, in hopes of getting further insight into which capabilities companies ought to work toward, we looked at the capabilities focused on by the top 25 percent of performers within the group using each of the three innovation strategies. (See Exhibit 2.)
No matter which of the three innovation strategies they pursued, all the successful companies depended on a common set of critical innovation capabilities. These include the ability to gain insights into customer needs and to understand the potential relevance of emerging technologies at the ideation stage, to engage actively with customers to prove the validity of concepts during product development, and to work with pilot users to roll out products carefully during commercialization.
In addition to these common capabilities, companies among the top 25 percent in performance within each strategic group depend on a set of distinct capabilities they feel are critical to achieve success, some of which overlap with those of other strategies. The most successful companies, we found, are those that focus on a particular, narrow set of common and distinct capabilities that enable them to better execute their chosen strategy.
Profiling the 2009 Global Innovation 1000
The global recession finally caught up with the world’s top innovators in 2009. Following a relatively strong 2008, during which total R&D spending continued to grow despite the recessionary headwinds, the 1,000 companies that spent the most on research and development decreased their total R&D spending in 2009 by 3.5 percent, to US$503 billion.
This decline in corporate R&D spending is the first we’ve seen in the more than 10 years we have tracked the global innovators, and it is clearly a result of the economic downturn’s impact on corporate R&D budgets. Revenue for the Global Innovation 1000 plunged at an 11 percent rate, from $15.1 trillion in 2008 to $13.4 trillion in 2009 — nearly three times the rate of decline in R&D spending. The result was that R&D intensity (innovation spending as a percentage of revenue) actually increased, from 3.5 percent to 3.8 percent, indicating that companies attempted to stay the course with their overall innovation programs, and that they continue to see innovation as essential for future growth. (See Exhibit 3.) Compared to the 3.5 percent reduction in R&D spending, the 1,000 top R&D spenders cut much more deeply into both sales, general, and administrative expenses (a 5.4 percent reduction) and capital expenditures (a 17.5 percent drop). (See Exhibit 4.)
The reductions in R&D spending, however, were neither as widespread nor as evenly distributed among industries as the overall numbers might suggest. Just over half of all the companies we tracked this year cut their R&D spending in 2009. Nearly all the cuts, however, came in just three industries: auto, computing and electronics, and industrials. The other industries increased spending to a greater or lesser degree. (See Exhibit 5.)
The auto industry alone accounted for fully two-thirds of the $18 billion contraction in R&D spending — not surprising, given the crunch the industry went through in 2009. A large number of auto parts suppliers fell into bankruptcy protection last year, and virtually every company in the industry cut spending in all areas of operations. Still, the industry’s 14 percent decrease in R&D spending was roughly in line with its 12.7 percent decrease in revenue; as a result, the auto industry’s R&D intensity was essentially unchanged, at 3.9 percent.
The computing and electronics industry reported similar but less drastic R&D spending reductions. The industry’s revenues were down by 7 percent from 2008 as a result of the recession and the accompanying drop in sales. Yet as with autos, the decline in R&D spending for computing and electronics — 7 percent — tracked the decline in revenue, so there was virtually no change in the industry’s R&D intensity.
Despite the $9.7 billion decline in its R&D spending, computing and electronics kept its top spot as the biggest spender on innovation, while autos remained at number three. (See Exhibit 6.) The industry in the number two spot, healthcare, increased its R&D spending by 1.5 percent — much slower than the industry’s recession-defying revenue growth rate of 6 percent.
Given the recession’s overall effect on innovation spending, it’s not surprising that companies headquartered in the regions that were hit hardest cut their R&D spending the most, on average. Of the top three regions, Japan registered the largest percentage drop in spending, at 10.8 percent, while North America’s spending declined by 3.8 percent and Europe’s by just 0.2 percent. (See Exhibit 7.)
The innovation programs of companies based in China and India, on the other hand, seemed unaffected by the recession: They boosted R&D spending by 41.8 percent (albeit from a small base; they account for only 1 percent of total Global Innovation 1000 corporate R&D spending). (See Exhibit 8.)
Changes in the list of the top 20 spenders provided further signs of the times. The Toyota Motor Corporation fell from the top spending spot among the Global Innovation 1000 for the first time since our 2006 study. (See Exhibit 9.) Toyota cut spending almost 20 percent, while its R&D intensity fell to 3.8 percent from 4.4 percent in 2008 — no doubt a direct result of its first-ever loss (more than $4.3 billion that year). Other automakers also fell on the Top 20 list, while most companies in computing and electronics rose a notch or two.
Taking over the number one position was pharmaceutical giant Roche Holding Ltd., which boosted its R&D spending 11.6 percent, to $9.1 billion. Indeed, healthcare companies took six of the top 10 spots on the list, and seven of the top 20. Coming in at number 1,000 was the medical manufacturer Seikagaku Corporation, which spent $59.5 million in 2009, down 7.5 percent from the previous year.
In hindsight, given the severity of the recession and the economic uncertainty that gripped the world, it seems inevitable that companies would cut their innovation budgets in 2009. Still, their overall unwillingness to reduce spending in line with their decline in revenues is a tribute to the importance companies in every industry now place on innovation as a key source of growth. Thus, with the recession drawing to a close and companies continuing to post strong earnings, 2010 will be an important test of their innovation mettle: The most forward-looking companies will move quickly to restore or even increase the R&D spending they cut in 2009 and to deploy it still more effectively.
— B.J. and K.D.