There is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance.
That is the outcome of an analysis by Barry Jaruzelski, Robert Chwalik, and Brad Goehle for Strategy+Business. During an evaluation of 1,000 publicly held companies (the Global Innovation 1000) with the most spend on R&D, Jaruzelski, Chwalik, and Goehle discovered “high-leverage” innovators spend their resources connecting their products and services with customers, and focus on the quality of their talent, strategic processes, and corporate decision-making.
The Global Innovation 1000 showed a few key facts in the relationship between R&D spending and sales. Overall, R&D increased 11.4 percent in 2018 with 88 of the 2017 high-leverage innovators had sales growth 2.6 times and market capitalization 2.9 times as high as other companies on the list. Further, high-leverage innovators’ R&D expenditures were lower than industry median (as a percent of sales).
Spending more money does not open the doors to innovation. Companies like Amazon and Apple spent less on R&D as a percentage of sales, yet they were selected as top innovators. The reason for this is the strategic way they go about innovation.
It isn’t about throwing money into a turning mechanism and hoping it comes out as a product on the other side. Innovation is driven by six key values that must be thread throughout the company, and how much attention is paid to those values (and how much success you glean from using them) is tied to what business segment you fall into.
Three Segments of Business Strategies
According to Jaruzelski, Chwalik, and Goehle, there are three segments of business strategies: Need Seekers, Market Readers, and Technology Drivers. It is significant to note that need 65% of need seekers have higher profitability and 59% report higher revenue growth than the other two segments.
Need seekers are companies that engage with their customers directly and create products and services that address gaps in the industry.
Market readers are companies that monitor competitors, the market, and their customers and transform current products or services to create value.
Technology drivers are companies that use their incredible internal technology to create products or services they hope meet both known and unknown needs of customers.
These segments have varying methods for strategy that, based on the analysis, give a clear idea of what currently works in delivering products and services to customers. Additionally, the research showed sharp differences between high performers (fast revenue growth) and both medium and low performers (those with similar or less success than competitors, respectively).
From these differences were gleaned six values that increase innovation and drive sales.
1. Make Your Innovation Strategy and Business Strategy Symbiotic
The analysis showed 77% of high performers’ strategies were aligned compared with 54% and 32% of medium and low performers. Further, 84% of need seekers had aligned their innovation and business strategies compared to 48% of market readers and 53% of technology drivers
Embracing strategic alignment means your R&D has a symbiotic relationship with your business strategy. Instead of supporting it through other divisions, the innovations match or support the mission and vision of the company. Advancement for advancement’s sake is shelved as innovation focuses on satisfying business goals.
Case Study
DIC, a leading global manufacturer of inks, pigments, and resins keeps the strategies tied together. General Manager Kiyotaka Kawashima says, “The budget control and administration are both done by the business units, and they approve the themes of technology and R&D.”
2. Engineer a Culture that Supports Innovation
71% of high performers aligned culture and innovation compared with 53% and 33% of medium and low performers, according to the analysis. Similar results occurred for the business segments. The majority of need seekers (82%) had cultures that supported innovation compared to 48% of market readers and 47% of tech drivers.
Cultural support has quickly proven itself as a deciding factor in many areas of a business. Employee satisfaction, positive customer support, and revolutionary changes are all intrinsically tied to company culture. Companies that build innovation support into their culture breed employees who are ready to engage with, provide for, and cheer on innovative ideas.
Case Study
Amadeus IT is mingling culture and innovation across its 45 locations around the world by creating a system of innovation champions who bring visibility to innovative ideas throughout the organization and advocate for and encourage new ideas.
3. Get Leadership Highly Involved in R&D Decision Making
Leadership involvement on R&D investments and strategies was important for the majority of high (78%), medium (62%), and low (53%) performers. It was just as important for need seekers (84%), market readers (63%), and tech drivers (57%). This data proves the critical importance of leaderships’ contribution to strategy.
Aligning the executive team with the innovation strategy is paramount to the rest of the values listed, especially since you’ll likely need executive approval to make many of the decisions associated with the values. Weaving innovation into the fabric of the company requires the support and persistence of leadership.
Case Study
At Stanley Engineered Fastening, the CEO constantly talks about innovation according to the CTO. He discusses breakthroughs in projects and products and drives teams to commercialize their ideas. His approach engages employees down the line, so that innovation is an entrenched passion throughout the company.
4. Form the Basis of Improvements and New Development Programs Around Customer Insights
Expectedly, 100% of respondents to the analysis said they valued deep customer insights. However, those with medium and low performance felt they had done enough to meet demands while high performers and need seekers felt they could do more. Additionally, market readers and tech drivers said their ability to respond to customer insights was their number one proficiency.
What the analysis shows from the Global Innovation 1000 is that top companies believe they need to continue learning and gathering customer data to better the customer experience, while other companies believe they’re doing enough. Even if your company has steadily high profits, the market is constantly changing, and high-performance companies know they need to stay ahead of the changes for quick adaptation.
Case Study
Adidas’ founder started the company after gathering insights from athletes about their needs and trialing solutions. As time went on, Adidas gained and lost customers, but then they decided to go back to their roots. According to the analysis, they are “focusing on open source innovation and co-creation with customers to develop new ideas.” Innovating directly with customers has brought Adidas back into the top rankings of performance.
5. Place an Emphasis on Project Selection
When they were asked which stage of product creation was the most important, 35% of respondents believed project selection is the most important stage of innovation while 31% believed it was ideation. 42% of need seekers thought project selection needs the most improvement compared with 29% of market readers and 33% of tech drivers.
A large percentage of costs associated with product development is tied to the beginning stages of product creation, so project selection and ideation are vital to product victory in the market. Because this stage can be costly, spending as little time revisiting it as possible is ideal. No matter how great your strategy is, it cannot make up for poor decision-making if weak ideas are pushed through.
Case Study
Stanley Black and Decker has two divisions of product development – Core Product Development teams and Breakthrough Innovation teams. The Core Product Development team pushes changes to current products along a strict timeline, while the Breakthrough Innovation team is encouraged to discover products that may not be a success, so they have greater opportunities for innovation.
6. Excel at the First Five Values and Use Them to Create Transformative or Disruptive Customer Experiences
Excellence at multiple values is the key in today’s market. Though in years past, a company may have thought it was good enough to do well in a couple of the sections, the standard has risen. The competition has grown exponentially, and the Global Innovation 1000 analysis each year shows this.
“Companies that aspire to the highest level of innovation leadership today need to excel at every aspect of innovation. And they need to make them converge in a way that pushes the boundaries of market expectations and transforms the customer experience,” say Jaruzelski, Chwalik, and Goehle.
The amount you spend on R&D doesn’t guarantee innovation excellence. Instead, companies must focus on strategy alignment, company culture, leadership engagement, customer insights, and careful, meticulous attention to the project selection phase. And above all else, they need to embed the values company-wide - not just in an isolated innovation department.
