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.