Booz Allen Hamilton: Global innovation study reveals a select group of highly efficient multi national companies (page 1 of 2)

"Innovation can lead to higher performance, but the process isn't automatic and it does not necessarily require above average levels of investment. The most successful companies combine an integrated process and a supportive culture to create a sustainable competitive advantage," Barry Jaruzelski, A Vice President of Booz Allen Hamilton. "There's no silver bullet, and just throwing money at the problem is not the answer."

The study found that although R&D spending of these 1,000 companies rose last year by more than $20 billion, money simply can't buy effective innovation. However, a group of 94 "high-leverage innovators," including Toyota, Apple, Christian Dior, Google and Caterpillar spend less than their competitors on research and development, yet consistently outperform their industry rivals across a broad set of performance measures.

"This survey reveals the significant impact overspending on R&D can have," added Jaruzelski. "As companies in the Middle East grow and are able to compete on a more multinational level, they will increase their R&D expenditures, but they must be wary. This study shows that diverse companies located all over the world suffer from inefficient, and poorly thought out research spending that does not necessarily result in healthy returns. These are problems any type of business can have without proper preparation."

BAH's landmark study concluded from their global innovation study the following about R&D spending and corresponding success or failure:

• Less than 10% of companies are High-Leverage Innovators. Using a basket of seven performance measures from 2000 through 2005 BAH found that 94 of the 1000 major corporations that were analyzed consistently outperformed their peers over the entire five-year period, while spending less on R&D as a percentage of sales than their industry median. These High-Leverage Innovators use many different models and approaches to outperform their competitors, but are generally noted for their distinctive skill in at least one element of the innovation process and are adept across all of the stages. Examples of these High-Leverage Innovators include Toyota, Google and Apple.

• Companies are getting better at squeezing benefits from their R&D spending. Although R&D spending by the Global Innovation 1000 rose last year by more than $20 billion, revenues rose at an even faster rate. Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40% of the companies actually increased their spending rate in 2005.

• Deep pockets can be dry wells. Money simply cannot buy effective innovation. There are no significant statistical relationships between R&D spending and the primary measures of financial or corporate success.

• Bigger can be better. Scale provides advantages to R&D spenders. For the largest 500 companies, median R&D spending was only 3.5% of sales in 2005, compared with 7.6% for the 500 smallest firms.

• Patents generally don't drive profits. Boosting R&D spending can increase the number of patents that a company creates, but there is no statistical relationship between the number or even the quality of patents and overall corporate financial performance.

• One size does not fit all. R&D budget levels vary substantially, even within industries, which suggests there's no consensus on the right level of innovation investment, since companies are using a range of different innovation business models.

• Effective innovators excel at four key elements.