What practices can we learn from the leaders in innovation? How can you improve the success of your R&D efforts? In "Smart Spenders, the Global Innovation 1000," an article in strategy+business magazine, Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia write about the key practices that the most successful innovators use.
About the Study
In the study, Booz Allen Hamilton set out to find which companies have been getting R&D spending right, and then to identify common attributes. They analyzed the data for the Global Innovation 1000 using seven performance screens: sales growth, gross margin percentage, gross profit growth, operating margin percentage, operating income growth, total shareholder returns, and market capitalization growth. They analyzed the following industries: Aerospace & Defense, Auto, Chemicals & Energy, Computing & Electronics, Consumer, Health, Industrials, Other, Software & Internet, Technology, and Telecom.
Jaruzelski, Dehoff, and Bordia identify some of the key practices for successful innovation:
- Deep pockets can be dry wells. Money simply cannot buy effective innovation. There’s no significant statistical relationships between R&D spending and the primary measures of financial or corporate success. Gross Margin is the single measure for which a relationship between R&D expenditures and corporate performance can be statistically demonstrated. The 500 companies that have the highest rates of R&D spending as a percentage of sales are more likely than other companies in their industries to achieve superior gross margins.
- Less than 10 percent of companies are high-leverage innovators. Only 94 of the companies in the Global Innovation 1000 produced significantly better performance per R&D dollar over a sustained period.
- Companies are getting better at squeezing benefits from R&D spending. Spending rose, but revenues rose more.
- Bigger can be better, even if it doesn’t boost break-throughs. Scale provides advantages to R&D spenders. For the largest 500 companies, ranked by revenue and indexed by industry, median R&D spending was only 3.5 percent of sales in 2005, compared with 7.6 percent for the 500 smallest firms.
- Patents generally don’t drive profits. Boosting spending can increase the number of patents that a company controls, but there is no statistical relationship between the number of patents that a company controls, but there’s no statistical relationship between the number or even the quality of patents and overall financial performance. Very few patents are truly significant — just as only a handful of books become bestsellers.
- Master of the innovation chain have an edge. The typical problems are good ideas get stuck in developmental bottlenecks and promising innovations never get to market because of flawed understanding of customer’s needs, and poor marketing and investment planning. The high-leverage innovators and the companies with best overall performance distinguish themselves not by the money they spend, but by the capabilities they demonstrate in ideation, project selection, development, or commercialization.
There’s No Silver Bullet
Jaruzelski, Dehoff, and Bordia dispell the idea that there’s a silver bullet:
"How did they do it? There’s no silver bullet; we found examples of many different models and approaches. If these high achievers have one thing in common, it seems to be a focus on building multifunctional, company-wide capabilities that can provide them with sustainable competitive advantage. They design their innovation investment for the long run, and create superior growth and profitability over time."
Innovation in the Nonprofit Sector
Jaruzelski, Dehoff, and Bordia shine a spotlight on St. Jude Children’s Research Hospital as both a success story and to compare and contrast with corporations. Here’s a rundown of the key points:
- Many nonprofits spend significant amounts on R&D, and although the metrics they use to measure performance are different from those of corporations, the challenges their leaders face in maximizing the benefits of innovation investments are often similar.
- St. Jude Children’s Research Hospital is widely recognized as an innovation leader in catastrophic pediatric diseases such as leukemia. It’s overall cure rate is 70% up from 20% in the 1960’s and it’s current goal is to raise the rate to more than 90%.
Innovation in St. Jude is intimately linked to delivery of service.
- Strategic decisions on R&D are made by St. Jude’s executive team and are based on an assessment of where the hospital can be most productive.
"I think we can do things that other places can’t do because of our focused mission." – Scientific Director James Downing
- At the ideation phase, researchers are given wide latitude. "In this business, the worst thing you can do is try to direct basic science and discovery, because you really don’t know where the advances are going to come from." – William E. Evans, CEO
- St. Jude is also an innovator in breaking down silo mentalities. Conscious effort is made to cultivate people in cross-disciplinary collaboration. The hospital has been designed so that employees in different disciplines — researchers, clinicians, pharmacologists, nurses, and geneticists — all work interactively and in close proximity.
- One result is that St. Jude is recognized for its skill at translating medical research into effective treatment.
- The bottom line for a nonprofit research hospital is different from that of a corporation. Instead of gross margin, net profit, and shareholder returns, St. Jude tracks such results as the decrease in mortality rates for specific diseases, the reduction in harmful side effects of treatments, and the number of times that studies by St. Jude researchers are cited in other research.
- "The most important thing we do every day is to provide unsurpassed care for kids who come here. The most important thing we do for tomorrow is our research, which will change that treatment to something better. Innovation, in and of itself, is the ultimate product of this organization." – William E. Evans, CEO
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