The Big R&D Spenders

February / March 2007 Volume 5 Number 1

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A select group of the world's 1,000 largest corporate R&D spenders perform significantly better than their competitors over a sustained period while spending less on R&D than their industry rivals, according to management consulting firm Booz Allen Hamilton's second annual global innovation study.
The study found that although R&D spending of these 1,000 companies rose last year by more than $20 billion, money simply can't buy effective innovation.
However, a group of 94 "high-leverage innovators," including Toyota, Apple, Christian Dior, Google and Caterpillar spend less than their competitors on research and development, yet consistently outperform their industry rivals across a broad set of performance measures.

Booz Allen analyzed the world's top 1,000 corporate research and development spenders—€”the Booz Allen Global Innovation 1,000—€”in what continues to be the most comprehensive effort to date to assess the influence of R&D on corporate performance. The study identified the linkages between spending on innovation and corporate performance, and uncovered insights into how organizations can get the greatest return on their innovation investment. Key findings of the study include:

—€ Less than 10 percent of companies are high-leverage innovators. This year's study analyzed financial data for the Global Innovation 1000 using a basket of seven performance measures from 2000 through 2005. Compared with others in their industries, only 94 of the 1,000 companies studied consistently outperformed their peers over the entire five-year period, while spending less on R&D as a percentage of sales than their industry median.

These high-leverage innovators use many different models and approaches to outperform their competitors, but are generally noted for their distinctive skill in at least one element of the innovation process and are adept across all of the stages. Google, for example, is known for generating new ideas with blistering speed. Toyota excels at developing its products and processes far more efficiently and effectively than most other companies. And Apple is noted for its well-honed capabilities in project selection and customer understanding.

—€ Innovation can lead to higher performance, but the process isn't automatic and it does not necessarily require above average levels of investment. The most successful companies combine an integrated process and a supportive culture to create a sustainable competitive advantage. There's no silver bullet, and just throwing money at the problem is not the answer.

—€ Companies are getting better at squeezing benefits from their R&D spending. Although R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, revenues rose at an even faster rate. Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40 percent of the companies actually increased their spending rate in 2005.

—€ Deep pockets can be dry wells. Analysis of the 2005 Global Innovation 1000 confirms the major finding from our initial study last year: Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success: sales and earnings growth, gross and operating profitability, market capitalization growth, and total shareholder returns. Gross profits as a percentage of sales is the single performance variable with a statistical relationship to R&D spending.

—€ Bigger can be better. Scale provides advantages to R&D spenders. For the largest 500 companies, median R&D spending was only 3.5 percent of sales in 2005, compared with 7.6 percent for the 500 smallest firms.

—€ Patents generally don't drive profits. Boosting R&D spending can increase the number of patents that a company creates, but there is no statistical relationship between the number or even the quality of patents and overall corporate financial performance.

—€ One size does not fit all. R&D budget levels vary substantially, even within industries, which suggests there's no consensus on the right level of innovation investment, since companies are using a range of different innovation business models.

—€ Effective innovators excel at four key elements. The high-leverage innovators distinguish themselves not by the money they spend, but by building strong capabilities in the four principal elements of innovation: ideation, project selection, product development, and commercialization. High-leverage innovators listen closely to their customers across the entire innovation cycle.
Companies such as Stryker and Black & Decker design their innovation strategy around a keen understanding of their end customers' needs.

"Our research found that most companies can achieve a greater return on their R&D spending if they view innovation as an end-to-end process that begins with a new idea and ends with a satisfied customer," said Kevin Dehoff, vice president at Booz Allen. "The most effective innovation is often not the most expensive."

The complete Booz Allen study can be found at
www.strategy-business.com/media/file/sb45_06405.pdf

RANK COMPANY R&D SPENDING HEAD- INDUSTRY R&D/ 2004
(in Millions) QUARTERS % SALES RANK
1 Ford 8,000 U.S. Auto 5 3
2 Pfizer 7,442 U.S. Health 15 2
3 Toyota 7,178 Japan Auto 4 5
4 Daimler-Chrysler 7,019 Germany Auto 4 4
5 General Motors 6,700 U.S. Auto 3 6
6 Siemens 6,546 Germany Industrials 7 7
7 Johnson & Johnson 6,312 U.S. Health 12 10
8 Microsoft 6,184 U.S. Software 16 1
9 IBM 5,842 U.S. Computing 6 9
10 GlaxoSmithKline 5,700 U.K. Health 14 11
11 Samsung 5,428 S.Korea Electronics 7 17
12 Intel 5,145 U.S. Computing 13 12
13 Volkswagen 5,071 Germany Auto 4 13
14 Sanofi-Aventis 5,025 France Health 15 31
15 Matsushita 4,989 Japan Technology 6 8
16 Novartis 4,846 Switz. Health 15 18
17 Nokia 4,753 Finland Electronics 11 15
18 Sony 4,698 Japan Electronics 7 14
19 Roche Holdings 4,578 Switz. Health 16 19
20 Honda 4,508 Japan Auto 5 16

Source: Booz Allen Hamilton Global Innovation 1000