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Published: January 8, 2008

 
 

Making Innovation Strategy Succeed

Booz Allen Hamilton Vice President Barry Jaruzelski discusses the process and findings of the annual Global Innovation 1000 study.

Innovation is a perennial hot topic in business, widely viewed as the key to corporate success. But how closely connected is R&D spending to performance? That is the question behind the Booz Allen Hamilton Global Innovation 1000, a yearly examination of the relationship between R&D investment and corporate success at the world’s 1,000 largest R&D spenders. Since the study’s inception in early 2005, Barry Jaruzelski, a vice president with Booz Allen in New York, has taken a lead role in it. He sat down with strategy+business in December 2007 to discuss his view of the research, including which findings most surprised him.

S+B: Tell us about the objective of the Global Innovation 1000 study and why you continue to monitor top innovation spenders even after finding no statistically significant relationship between R&D spending and financial performance.
JARUZELSKI:
When we started, in 2005, we really wanted to test a proposition that had become an article of faith in the innovation arena: “Spend more on R&D and growth, and differentiation and other good things will come.” Yet our years working in innovation had taught us that just throwing money at the problem was not the answer. Rather, successful R&D requires certain approaches to organization, culture, and decision making. Many of the biggest innovation successes of recent years were not produced with the biggest budgets. And we’ve observed that excess resources can actually impede effective innovation efforts.

So, with that hypothesis, we set out to perform a robust test of the relationship between R&D spending and corporate success and found no statistically significant connection. We did note in the first year of the study that there is a sort of minimum threshold — that if a company fell into the bottom 10 percent of R&D spending in its industry peer group, its performance was compromised. But being in the middle of the peer group or in the top 10 percent had no real impact on performance. Those results demonstrated that it’s really not about how much a company spends on R&D. It’s about how the company goes about doing it — the processes, the tools, the organization, the culture, and the portfolio choices it makes.

Having confirmed in the first year of the study that money isn’t the key to innovation success, we wanted to see if there was a set of companies that consistently outperformed their peers while spending less. So in the second year we came up with the idea of the High-Leverage Innovators — companies that outperformed the median of their industry peer group over a five-year period against several metrics covering revenue growth, profit growth, and shareholder returns while spending less than their industry’s median on R&D.

What emerged from that was a list of 94 companies that included names that had become synonymous with innovation, firms like Apple, Christian Dior, Adidas, Google, Yahoo, Black and Decker, Hyundai Motors, Honda Motors, and others. These were not companies that were starving the beast. They could not have chalked up five consecutive years of above-median performance against all metrics of profit and growth and shareholder returns while spending less if they were doing something untoward to the institution. These companies had come up with a model for high-leverage innovation.

The other big idea that we tested in the second year involved the role of patents as an indicator of innovation success at the corporate level. We examined an extensive database of patents and found that if companies spent more money on R&D, they did get more patents, but the level of patent activity did not correlate with corporate success as measured in terms of growth, profitability, and shareholder return.

 
 
 
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Resources

  1. Kevin Dehoff and John Loehr, “Innovation Agility,” s+b, Summer 2007: How to follow Toyota’s example to create your own versatile product development process. Click here.
  2. “How Companies Turn Customers’ Big Ideas into Innovations,” strategy+business / Knowledge@Wharton, January 12, 2005: Practices for customer-conscious product development. Click here.
  3. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: The latest installment of Booz Allen Hamilton’s annual study of the world’s largest corporate R&D spenders finds two primary success factors: aligning the innovation model to corporate strategy and listening to customers every step of the way. Click here.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Money Isn’t Everything: The Global Innovation 1000,” s+b, Winter 2005: Lavish R&D budgets don’t guarantee performance. The 2005 Booz Allen Hamilton study reveals the value of an innovation dollar — and the basics of a better strategy. Click here.
  5. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: Booz Allen Hamilton’s 2006 study uncovers a small group of high-leverage innovators that outperform their industries. Click here.
  6. 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.
  7. W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Harvard Business School Press, 2005): This book shows how companies can use innovation to lead them to unclaimed “blue oceans” of profits and growth. Click here.
  8. Eric von Hippel, Democratizing Innovation (MIT Press, 2006): Demonstrates the value of “user-centered innovation” and shows how to incorporate the customer into the innovation process. Click here.
 
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