Booz Allen Global Innovation 1,000 - Money Simply Can’t Buy Effective Innovation
Key findings of the study include:
Less than 10% of companies are High-Leverage Innovators. 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.
Companies are getting better at squeezing benefits from their R&D spending. 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% of the companies actually increased their spending rate in 2005.
Deep pockets can be dry wells or 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. For the largest 500 companies, median R&D spending was only 3.5% of sales in 2005, compared with 7.6% 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 >> commercialization.
High-leverage innovators listen closely to their customers across the entire innovation cycle. “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,” said Barry Jaruzelski, a Vice President at Booz Allen. “There’s no silver bullet, and just throwing money at the problem is not the answer.”
Additional study findings include:
- The Global Innovation 1000 companies spent a total of $407 billion on research and development in 2005, up 6% from 2004
- Global R&D spending is highly concentrated among the top 1,000. The next 1,000 companies spent a total of a mere $25 billion in 2005. Booz Allen estimates that the Global Innovation 1000 accounts for about 85% of total global corporate R&D spending, and 55% of all R&D spending, including government and not-for-profit R&D.
- The top 10 global R&D spenders in 2005 were, in descending order: Ford, Pfizer, Toyota, Daimler Chrysler, General Motors, Siemens, Johnson & Johnson, Microsoft, IBM, and GlaxoSmithKline.
- R&D spending is highly concentrated in just a few large industries. Nearly two-thirds of the 2005 total was spent in just three industries: computing and electronics (26%), health (22%), and automotive (17%).
- The proportion of R&D spending by Innovation 1000 companies outside the traditional leaders of Europe, North America and Japan increased by nearly 60% in 2005, to 4.6% of the total for the world’s top 1,000 corporate R&D spenders.
Booz Allen Hamilton Global Innovation 1,000: Study Methodology
Booz Allen Hamilton identified the 1,000 public companies around the world that spent the most on research and development in 2005 (companies for which public data on R&D spending was available). Subsidiaries that were more than 50% owned by a single corporate parent were excluded because their financial results were included in the parent company’s reports.
Booz Allen analyzed key financial metrics for each of the top 1,000 companies for 2000 through 2005 — sales, gross profit, operating profit, net profit, historical R&D expenditures, and market capitalization. In addition, total shareholder return was computed and adjusted for each company’s corresponding local market total shareholder return.
Each company was coded into one of 10 industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations according to reported headquarters locations for each company. To enable meaningful comparisons across industries on R&D spending levels, Booz Allen indexed the R&D spending level for each company against the median R&D spending level for that industry. A similar approach was employed for financial metrics. Approximately 10,000 analyses were required to explore all combinations of timing lags, regions, performance variables, and industries.