Is heavy investment in R&D a guarantee of bottom line success? No say Booz Allen Hamilton’s Alexander Kandybin and Martin Kihn in an article posted on the Booz Allen website Strategy+Business..
Drawing conclusions that seem to fly in the face of conventional wisdom, they state, “Our recent work has shown … each additional dollar spent on new product development ultimately yields a lower and lower return.” They say that both anecdotal and statistical evidence indicate that additional spending on product innovation does not yield a direct acceleration of sales, market share, or profits.
In support of this thesis, they point out that the ratio of new consumer products introduced in the United States to increased sales is greater than 2 to 1. Kandybin and Kihn cite their own analysis of personal-care and consumer healthcare companies as evidence that there is “…no clear correlation between R&D spending as a percentage of sales and growth in revenues or profitability.” They find further support in Christoph-Friedrich von Braun’s 1997 book The Innovation War, in which 30 Global 500 firms were analyzed, and almost no correlation was found between increased R&D spending and improved profitability.
Kandybin and Kihn identify four critical sets of capabilities necessary for successful innovation — ideation, project selection, development, and commercialization. They stress how hard it is for a company to be expert in all four and note that an innovation chain is only as strong as its weakest link. They suggest outsourcing potential weak links in this innovation chain while strengthening internal capacity in those links that simply cannot be outsourced. Project selection and commercialization are identified as processes that must remain within a company, but ideation and development are seen as ripe for outsourcing.
The writers identify an innovation effectiveness curve that they believe can be determined for every company. (More on this innovation effectiveness curve) Interestingly in his just out book, Free Prize Inside, Seth Godin identifies a curve that shows a purported diminishing return for increased spending on technology and traditional interruptive marketing.
While the Booz Allen authors and Godin are not saying exactly the same thing about R&D dollars they are addressing the area of innovation and its value chain with new insight at the same moment. Their independently arrived at conclusions make for very interesting reading. Also, Kandybin and Kihn, in their proposal for greater outsourcing of links in the R&D chain, may be pointing toward more symbiotic relationships between traditional big-firm R&D and smaller enterprises. If they are right, and if Godin’s concept of what really constitutes viable innovation holds water, then small businesses can look forward to new and increased markets for their ability to innovate quickly.