The most innovative companies increased their R&D investment last year by twice the dollar amount of 2005's R&D spending rise according to a new report from Booz Allen Hamilton. For the first time in four years, the pace of R&D spending in 2006 caught up to the rate of sales growth among these companies said the report. North American headquartered companies led the way with the largest increase in absolute spending, while R&D investment in emerging markets continues to grow rapidly, but remains a relatively small percentage of the global total.
Companies that get the greatest return from their R&D investment also attributed much of their success to their focus on customer insight throughout the innovation process. In fact, companies that emphasize direct customer engagement reported three times higher operating income growth, 65% higher total shareholder return, and two times greater return on assets than companies less focused on customer feedback.
Key findings of the study include:
R&D spending caught up to sales growth in 2006. R&D spending by the Global Innovation 1000 rose last year by $40 billion to $447 billion, a 10% increase.
Companies headquartered in North America increased their absolute R&D spending by 13%, representing the largest source of dollar growth among the Global Innovation 1000. North American headquartered firms sustained their lead in innovation spending, having increased their absolute R&D spending by $21 billion in 2006, as compared with China and India which increased spending by only $400 million during the same period. Companies headquartered in China, India and the rest of the developing world represent just 5% of overall corporate spending on R&D in 2006, but their five-year average growth rate suggests a desire to catch up quickly. China and India grew their 2006 spend by 25.7% over last year, in keeping with a five-year average rate of growth of 25%.
"While there is more than one innovation strategy that can win in the marketplace, it is clear that the key to superior performance lies in linking innovation strategy and corporate strategy -- and in focusing on the customer in ways that can best promote strategic success," said Barry Jaruzelski, Vice President at Booz Allen.
Money alone cannot buy effective innovation, according to the findings. Analysis of the 2006 Global Innovation 1000 again confirms the major finding from previous studies: there are no statistically significant relationships between R&D spending and the primary measures of financial or corporate success, including sales and earnings growth, gross and operating profitability, market capitalization growth and total shareholder returns.
"We found that companies place an increased value on innovation, but more spending doesn't necessarily lead to smarter spending or better results," said Kevin Dehoff, Booz Allen vice president. "With increased competition leading to thousands of new products being released every year, companies must improve their innovation processes to succeed."
Effective innovators tightly manage the innovation process. As they execute the four principal elements of innovation: ideation, project selection, product development, and commercialization, every company Booz Allen talked to had a disciplined stage-gate process combined with regular measurement of everything from time and money spent in product development to the success of new products in the market. This, combined with a strong portfolio management program, has allowed these companies to understand better how their innovation engines promote their companies' long-term growth.
Additional study findings include:
R&D spending remains highly concentrated in a few large industries. More than two-thirds of the 2006 total were spent in just three industries: Computing & Electronics (29%), Health (22%), and Automotive (17%).
Every industry with the exception of Automotive accelerated its pace of R&D spending in 2006, with Health leading the way with five-year average growth of 13%, followed by Software & Internet at 12%. Only the automotive industry spend grew at a slower rate over the last year (1.3%) than its 5-year historic growth rate (4.2%).
To view the study visit http://www.boozallen.com/media/file/Global_Innovation_1000_2007.pdf