There is no direct relationship between the amount of cash a company sinks into research and development and how well it performs, according to an enlightening new report carried out by management consultancy Booz Allen Hamilton. With pharmaceutical companies continuing to plough funds into R&D, believing it to be essential for growth, the survey’s finding that “money doesn’t buy results” may come as some surprise: in fact, there was an absence of any detectable statistical relationship between R&D spending levels and measures of business success, including sales growth, gross profit, operating profit, enterprise profit, market capitalization or total shareholder return.
Booz Allen Hamilton’s global innovation survey, which looked at the world’s top 1,000 corporate R&D spenders, was designed to reveal any links between spending on innovation and corporate performance, as well as provide some useful insights on how businesses can reap the greatest benefit from their investment in R&D. “There is no easy way to achieve sustained innovation success - you can’t spend your way to prosperity,” said Booz Allen Hamilton’s vice president, Peter Parry, adding: “Successful innovation demands careful coordination and orchestration both internally and externally. How you spend is far more important than how much you spend.”
Yet investment in innovation is showing no signs of a slow-down. According to the firm, the companies surveyed spent $384 billion on R&D in 2004, up 6.5% on the previous year but 11% over 2002 - indicating an accelerating pace of investment. Furthermore, while the R&D spend by organisations in developing nations is relatively small, it is also rising rapidly. China and India’s yearly growth rate for R&D investment from 1999 to 2004 was 21.1%, a far cry from North America’s 6.6%, Europe’s 6.2% and Japan’s 4.8%.
“The competitive value of a fast and effective innovation engine has never been greater,” noted Parry, with particular reference to the emerging trend of shorter product lifecycles and a quickening stream of new offerings. “Yet of all the core functions of most companies, innovation is often managed with the least rigour. The key is to identify the priority areas where innovation will have the greatest impact on performance and opportunity creation,” he concluded.