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R&D Expenditure and Innovation: Bang For The Buck

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Apple is rated as the most innovative company by Fortune. TheStreet finds that, “Apple’s recent financial — and stock — success has resulted from merely holding the line on one of the sources of that innovation: its spending on research and development. Even while Apple’s revenue has skyrocketed in recent years — and even as expectations for future products and success have exploded — what the company has spent on R&D has risen only modestly. As a portion of overall sales, such expenses have actually fallen by more than half.”

The sales have grown at a compounded annual rate of 27% over the past four years, while R&D spending has grown at an average rate of just 5.6% per year over that period. As Michael Scrage recently wrote brilliantly, the simple fact is that R&D spending is an input, not a measure of efficiency, effectiveness or productivity. “Ingenuity, invention and innovation are rarely functions of budgetary investment … Wal-Mart, Texco and Dell have miniscule R&D budgets, their quality, procurement and growth requirements have probably done more to drive productive innovation investment than any competing initiatives.”

The cornerstone of innovation is growing market competition and not growing R&D spending. One way to assess the effectiveness of innovation policy is to look at contribution towards cost-effectiveness and create an edge towards product uniqueness. It may be improper to confuse number of patents as an index of innovative abilities. In general, process innovation is far more powerful than product innovation – it has a multiplier effect that product innovation can rarely match.

The best way to look at innovation activity is the rates of productivity improvement in value-add inside enterprises measured against the number of employees. Plain financial metrics may be of little use in assessing productivity increase – the ability to bring multiplier effects through productivity initiatives may be the one to watch for. Look at the spend levels of IBM, HP, Microsoft, Sony – list the number of innovative products that have come out of their labs in the past 24 months. Look at the R&D expenditure of the like of Apple, Google, RIM and list the innovative products that have rolled out of these enterprises – the answer is straightforward: There is no link between R&D, productivity improvements or innovation.

One does not need to spend about five billion in R&D to find that the next big thing does not exist. The innovaton charter within enterprises – the goal of research & innovation inside enterprise and its nature and the industry in which it operates, all these matter a lot more. In high-growth industries like high tech — the direction and nature of innovation — evolution, efficiency improvement or revolution would to a large extent characterise the type of efforts and the resultant benefits that enterprises can enjoy.

It’s clear organizational interest, results orientation, quality of leadership, the latitude the research team has, and the integration that business and research has within the enterprise matter a lot. Clearly these are the factors that get severely affected when organizations grow. It’s time to look at assessment of new product /new revenue streams coming out of enterprises a lot more closely as they begin to grow.

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