Innovation 1000: Companies Profiting from R&D

An excellent study of companies spending money on R&D over the last five years, and their payoff (or not): Smart Spenders: The Global Innovation 1000.

Some takeaways from this study:

Patents don't equal profit. Although a common measurement for innovation, it's a distractor: portfolio doesn't equal profit.

"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.... Researchers who study innovation estimate that 70 to 80 percent of the final unit cost of a product (the cost reflected in gross margin) is driven by R&D-based design decisions — for example, product specifications, the number and complexity of features in a device, the choice of standardized or customized parts, or the selection of manufacturing processes. This correlation of R&D spending and gross margin shows that in many companies, the R&D silo has succeeded in its narrow goal: creating a lower-cost offering that thus yields a wider margin, or a more differentiated offering for which a higher price can be charged.

R&D money is being offshored-- or innovation is now occurring in the "rest of the world" rather than Europe, North America, and Japan.

The "integrated value chain" of innovation shows that companies that leverage their "ideation" into commercial products more efficiently are seeing payoff. This makes sense, but seems to be hard to do.

Many high-leverage companies apply distinctive approaches to innovation at all four stages. For example, from the ideation stage through project selection and product development, high-leverage innovators tend to prize end-user input. The Stryker Corporation, a $4.9 billion medical technology company headquartered in Kalamazoo, Mich., works closely in R&D with the surgeons and other medical professionals who use its products. The Black & Decker Corporation’s innovation strategy is also heavily determined by end-users. “We’ve spent a lot of time focusing on where they work, where they play, where they buy, and where they learn,” says CFO Michael Mangan. “Understanding and developing those relationships really increases the efficiency of our new product introductions.”

There are two great stories of how two very different companies seize opportunities. SanDisk operates by watching the market for parts and capitalizing on opportunities offered by lower costs.

In the flash memory industry, prices fall 40 to 50 percent per year. Thus, at SanDisk, a small team of senior executives meets twice per week to monitor prices and market trends. Their awareness, fed back into the company’s innovation process, allows SanDisk to act quickly on new opportunities. In 2004, for example, the company realized that falling costs had created an opportunity for it to enter the market for MP3 audio players with a flash memory–based device. Management contacted an original equipment maker, defined design specifications, and delivered the new product to retailers’ shelves within six months. The SanDisk player is now number two in the market, after Apple. “We don’t have big planning and product committees,” says SanDisk Chief Financial Officer Judy Bruner. “Most decisions, even those involving huge capital commitments, are made pretty quickly by a small number of pretty visionary people.”

Symantec leverages shared code and a strong core engineering team that allows them to be nimble when responding to changes. “We have a large portfolio of products and business units,” says Ann Marie Beasley, vice president of strategy. “One of the key contributors to our R&D bang for the buck is that there’s a lot of common engineering and design, as well as actual code reuse.”

Not profiled in this article, I recently read an update on Philips Design in Fast Company: Design Intervention. Philips has been recruiting for at least 6 years for its R&D Lab, and I keep wondering what's up with them. This piece pointed out a couple positives from their output, which I recall seeing in stores, including the the Ambilight HD LCD display.

A 1995 Philips Design project called "Vision of the Future" was conceptually very similar to the Simplicity extravaganza in Manhattan--a flood of flash-forward products and ideas. Indeed, the concepts unveiled back then read today like a laundry list of the technologies that are changing our lives, including personal digital assistants and voice-recognition systems. Three years later, though, Philips went back to see how many of those concepts had actually gone into production and discovered that while a laudable 60% were already for sale, only 3% of them were made by Philips. "Their design and technical specs were usually good," says Enrique Dans, a professor at Instituto de Empresa Business School, "but they were disconnected from the market."

They're learning from history and adjusting, it seems.

"Philips's total sales from products introduced in the last year were 49% of total revenues in 2005, up from just 25% in 2003. In medical systems alone, an industry with long product cycles, some 70% of revenues came from products less than two years old--up 20 percentage points from the previous year. And despite disappointing LCD results in 2006's second quarter, from a less-than-expected World Cup boost, growth in Philips's medical systems and consumer electronics came in better than expected, at 9% and 10%, respectively."

I'm always impressed by companies that learn from history. And by good analysis in business. Edited to add: There's a nice piece here about a guy studying incentives for failures, a critical part of the innovation process. A lot of companies pay lip service to the value of risk-taking and failure in the corporate learning process, but few of them have incentive plans that reward risk-taking with failure rather than rewarding only the success stories. Employees aren't dumb when it comes to rewards vs. lip service and know what really counts to their managers.