Monday, February 12, 2007

For innovation success, do not follow the money

By: By Michael Schrage, sitePublished: Nov 07, 2005

The excerpt builds off the Open Innovation discussion in an earlier posting. I believe Open Innovation approaches can dramatically enhance R&D productivity as defined below. Open Innovation is NOT about reducing cost; it IS about enhancing our innovation effectiveness.

...............Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions. Few things reveal less about a company's ability to innovate cost-effectively than its R&D budget. Just ask General Motors. No company in the world has spent more on R&D over the past 25 years. Yet, somehow, GM's market share has declined.

"There is no correlation between the percentage of net revenue spent on R&D and the innovative capabilities of an organization – none," Bart Becht, chief executive of Reckitt Benckiser, the Anglo-Dutch consumer cleaning products leader, said recently. The $8bn-per-year revenue company reports an R&D intensity of 1 per cent. Nevertheless, Mr Becht's company enjoys a reputation both for innovation and for relatively high margins of its global products. Similarly, Illinois Tool Works – a diversified $11bn industrial products company – spends but 1 per cent of its revenues on R&D across its 665 business units. Yet the 93-year-old company is likewise regarded as a premier industry innovator that consistently ranks in the top 100 of US corporate patent recipients. Even Apple Computer defies the high-tech, high R&D intensity stereotype associated with successful innovation icons. Apple's 2004 R&D intensity of 5.9 per cent lagged behind the computer industry average of 7.6 per cent. More significantly, its $489m annual R&D spending was a fraction of larger competitors such as Sony or Microsoft. Yet the iPod, iTunes and iBook enjoy breakthrough status as profitable innovations that have extended the company's global reach.

This anecdotal evidence is not atypical. Last month, Booz Allen, the consulting giant, published a report confirming the fears of executives who see innovation as a holy grail to market share and profitability. The survey of the world's top 1,000 corporate R&D spenders found there was "no discernible statistical relationship between R&D spending levels and nearly all measures of business success including sales growth, gross profit, operating profit, enterprise profit, market capitalization or total shareholder return". In other words, more is not better. ..............

R&D productivity – not R&D investment – is the real challenge for global innovation. Innovation is not what innovators innovate, it is what customers actually adopt. Productivity here is not measured in patents granted but in new customers won and existing customers profitably retained..............

What is not fine – what is deceptive and destructive – is perpetuating a myth that the economic health of a country or of a global enterprise can be measured by how much it allegedly spends on R&D as a bid to invent the future.

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