Monday, October 29, 2007

Study Finds the World's Leading Corporate Innovators Stepped Up R&D Spending in 2006

Booz Allen Hamilton’s third annual analysis of the world’s 1,000 largest corporate R&D spenders, finds that these corporations increased their R&D investment last year by twice the dollar amount of 2005’s R&D spending rise. 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. North American headquartered companies led the way with the largest increase in absolute spending; R&D investment in emerging markets continues to grow rapidly, but remains a relatively small percentage of the global total.

Booz Allen also identified three distinct corporate innovation strategies, but concluded that the most significant performance differences lay not in which innovation strategy was used, but in how tightly it was aligned with overall corporate strategy. 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.

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. The gain is double the group’s five-year compound annual growth rate and an amount more than twice the 2006 Gross Domestic Product of the Republic of Ireland. And for the first time in four years, the ratio of R&D-to-sales leveled off, ending a sustained four-year decline, with R&D spend matching sales growth (which was also 10%)

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%.

Most companies adopt one of three strategies for effective innovation. Booz Allen identified three distinct corporate innovation strategies, through analysis of a subset of this year’s 1,000 top R&D spenders, surveys and follow-up interviews with C-level executives. However, no one of these three strategies consistently outperforms the others:

Need Seekers — Actively engage current and potential customers to shape new products, services and processes, and strive to be first-to-market with those products. The DeWalt division of Black & Decker, for example, stresses engagement with customers, and grew its U.S. power tools business from $150 million to more than $2 billion, increasing market share from the teens to 50%. DeWalt’s engineers and marketing product managers regularly visit homebuilding job sites to study building trends and their impact on the company’s products.

Market Readers — Watch their markets carefully, but prefer to maintain a more cautious approach, focusing largely on driving value through incremental change. Plantronics, a maker of headsets and other audio equipment, closely follows technological and user trends in both the commercial and consumer market, creating strategic partnerships with its major corporate customers and relying on a set of strategic filters, such as potential return of investment and sales forecasts, to determine what products to bring to market.

Technology Drivers — generate product ideas by deploying their technological skill and relying on unarticulated customer needs for product inspiration, rather than following the market or direct customer input, to drive both breakthrough innovation and incremental change. Siemens, the German engineering and electronics leader, aligns its long-term innovation portfolio around certain megatrends, such as the rise of personalized healthcare.

Companies that more closely align their innovation model with their corporate strategy perform better. Companies that align their corporate and innovation strategies have superior financial performance, with 40% higher operating income growth and twice the shareholder returns over the last three years than companies with strategies that are less well-aligned.

More than 11% of companies are High-Leverage Innovators. Compared with others in their industries, 118 of the 1,000 companies studied consistently outperformed their peers over the entire five-year period, while simultaneously spending less on R&D as a percentage of sales than their industry median, marking a more than 25% increase in the number of companies that earned recognition in this category compared to last year.

These High-Leverage Innovators attribute much of their success to their focus on the entire innovation value chain, from generating new ideas, to product development, to marketing. All appeared to work hard to make sure their innovation strategies were closely aligned to overall corporate strategy. And all shared a focus on the customer, and the processes they employed to maintain their customer focus throughout the innovation value chain.

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