Without investment, innovation withers.
But don’t make the mistake of assuming that as the sum of money invested grows, so grows the return on investment. There is no quid pro quo. That’s the conclusion of a recent study from management consultant Booz Allen Hamilton.
Global Innovation 1000, a survey of the 1,000 publicly held companies around the world that spent the most on research and development in 2004, produced some interesting results. Among them:
- "There is no relationship between R&D spending and the primary measures of economic or corporate success, such as growth, enterprise profitability, and shareholder return," reports Booz Allen Hamilton’s magazine Strategy+Business.
- However, not spending enough is harmful, so cutting R&D budgets must be done carefully.
- It’s hard to know how much R&D spending is enough. Too much bites into shareholder returns and draws out the resources that should be available for future innovation. Not enough and innovation falters. Finding the right amount will maximize the return on investment.
- "Larger organizations can spend a smaller proportion of revenue on R&D than can smaller organizations" without taking a discernible performance hit.
- "The quality of an organization’s innovation process—the bets it makes and how it pursues them," is more important than the size of investment spending.
The problem is that most companies operate as if the more they put into R&D, the bigger the return will be.They are trying to continue living in a world when "products were simpler, industrial processes less mature, and competition less fierce."
However, the day when "companies could make new products and be reasonably certain that their customers would buy them" no longer works as well.
It’s time to change that thinking, says the report. Today, speed in turning out effective new products is key. Innovate smarter, not bigger.The companies that are quickest to learn that the old way no longer guarantees success are the ones that will lead the next wave of innovation.