Here I’m discussing the myth that simply increasing R&D funding will propel an organization from innovation collapse to innovation crescendo.  I call it the “Let’s throw money at R&D” solution.  When a company is in crisis because of poor R&D performance, upper management might think that significantly increasing the R&D operating budget will solve the problem.  However, such an approach seldom works.

In this post and the next post I will explore the types of R&D spending that make sense, focusing primarily on investing in R&D “organizational infrastructure” and talent, verses innovation spending and R&D project execution.  Just as it would make no sense to invest in a Ferrari if you could only drive it on badly maintained roads, R&D product development and innovation are part of a complex organizational design that need a strong base to succeed.

The Myth: “The more money invested in R&D the better the commercial results”

It might seem intuitively obvious that if a company spends more on R&D, then it will translate into an increase in growth.  However, in practice it doesn’t seem to work like that.  In fact, there is very little correlation, if any, between normalized R&D spending and company performance as measured by sales growth¹.  When you look at the data in the table below you’ll see that different industries spend vastly different percentages of their revenues on R&D².

Industry                                                                  % of revenues spent on R&D

Clearly some industries have a higher R&D burn rate than others.  But even within the same industries, there seems to be no clear correlation between R&D spending and growth.  In fact many high-performing companies, such as Apple, are relatively conservative in their R&D spending, at least as a percentage of revenues, and spend comparatively less on this basis, than their competitors.

This leads to the question: When will more investment in R&D generate incremental growth and when will throwing money at R&D be a waste in terms of generating new products and boosting sales growth?  My answer depends, in part, on the state of the R&D organizational infrastructure, capacity and effectiveness at the time of the investment and that is the focus of today’s discussion.

First invest on improving R&D culture, alignment, organization and processes to build R&D infrastructure, capacity and efficiency

When a company needs to build R&D pipeline capability, especially following an innovation collapse, it may approve a large operational budget which R&D leadership might allocate without consideration of whether the R&D organizational infrastructure can support any of the proposed innovation initiatives.  In cases of a company trying to emerge from innovation collapse, an audit of R&D organizational infrastructure is especially critical because the R&D organizational infrastructure will often have been neglected for some time.

Spending on improving the R&D organizational infrastructure to improve the effectiveness of R&D and increasing the project capacity of R&D will ultimately increase the value of the R&D portfolio so that more projects can be added without the focus being on extra headcount.  This is money well spent … even innovative projects fail when they’re implemented on top of a “house of cards”.

When you’re thinking about how to improve efficiency and create capacity through maintaining and developing R&D organizational infrastructure think about the R&D culture, the alignment of the company’s innovation strategy with the corporate strategy, the structure of the R&D organization, the NPD governance system and the R&D processes.

Aligning the innovation strategy with the corporate strategy is crucial to ensure innovative projects don’t disappear into a deep dark chasm after they leave R&D. Remember Xerox invented the graphical user interface, the mouse pointing device and the Ethernet protocol used by the Internet, but never successfully commercialized these breakthrough products, whereas other companies such as Apple, Microsoft and Cisco leveraged their businesses on them.  Was it because these breakthrough products were outside of their corporate strategy or was there another reason that these products were never commercialized by Xerox?

Optimizing the New Product Development (NPD) process for efficiency in both reduced cycle-time and improved success rate, and analyze the speed and quality of portfolio management decisions are also crucial for success. If you want to get the biggest R&D bang for the buck, the size and mix of projects in the R&D portfolio is important.  If the portfolio is filled with too many small projects the R&D group might be large and busy but not very productive in terms of generating new sales growth.  If the portfolio has a few, large projects that are disruptive in nature, you may have all your eggs in one basket.  For example, Steve Job’s Apple chose a small number of innovative projects to execute and diverted a large amount of resources to them which forced alignment across the company and minimized the time to launch.  Apple, however, seems to be an outlier in consistently picking large successful innovative projects and most companies will not be as successful with such a strategy and will need a more diversified portfolio.  To reduce risk in this case it’s important to realign the portfolio with a more balanced mix of projects aligned with strategic goals and have the right resources in place to make it happen.

Finally, remember to keep nurturing the innovation culture within the company, leverage consumer insights, and be mindful of the investment risk that the company is willing to bear.

Summary 

Every R&D organization’s capacity for developing and launching new products is limited by the capacity of their organizational infrastructure and talent³.  This means there is an optimal number of projects a company can execute. Therefore improving the R&D organizational infrastructure and talent will improve capacity … conversely, overloading an R&D group with too many projects will make them more inefficient.  I believe that increasing spending on R&D projects or innovation to generate growth without efforts to first improve R&D culture, alignment, organization, processes and talent, will result in poor returns.  Efforts to first increase the capacity and effectiveness of R&D groups, together by getting the best talent available will be better rewarded.  After the capacity and effectiveness of the R&D group has been improved, increases in R&D project spending can be contemplated and will achieve better commercial results.

Postscript

For those fortunate enough to work in an organization that recognizes that R&D has an organizational infrastructure which must be continuously maintained and improved to generate high returns on R&D investment, I recommend regular audits across your organizational infrastructure and regular benchmarking studies to identify any possible emerging gaps.

Footnotes

1. http://www.strategy-business.com/media/file/sb41_05406.pdf
2. http://www.strategy-business.com/media/file/00140-The-Global-Innovation-1000-Making-Ideas-Work.pdf
3. Please see my next post for a discussion on allocating budget to acquiring talent.

© Dennis Nelson 2013