I recently read a provocative article, Money isn't Everything (free access, registration required), in Strategy + Business, a magazine published by Booz Allen Hamilton, the consulting firm. The authors studied the top 1000 publicly held companies that spent the most in R&D in 2004 and concluded that "There is no relationship between R&D spending and the primary measures of economic or corporate success, such as growth, enterprise profitability, and shareholder return." Instead, they suggest that "Superior results, in most cases, seem to be a function of the quality of an organization’s innovation process — the bets it makes and how it pursues them — rather than the magnitude of its innovation spending."
The article goes on to explain the results of their study. To summarize, in the authors' own words:
"The myth that higher R&D spend translates into competitive advantage has been around for decades, but it appears to be particularly strong now. [. . .] Perhaps this belief is a holdover from the past. When products were simpler, industrial processes less mature, and competition less fierce, companies could make new products and be reasonably certain that their customers would buy them. The R&D, manufacturing, marketing, and sales silos could do their jobs independently with little imperative to manage across departmental boundaries."
"We no longer live in that world. Shorter product life cycles have led to an ever-faster flow of new offerings. Customer demands for special features have generated enormous complexity. In turn, these factors have increased the competitive value of a fast and effective innovation engine. Yet of all the core functions of most companies, innovation may be managed with the least consistency and discipline."
For the major part of my career, I have been involved in technology transfer programs to get innovations from the labs to the marketplace. Let me offer some observations based on my personal experience over the years.
I totally agree with the authors that inventions, patents and R&D spending are not by themselves sufficient for a business or a nation to be an innovation leader and achieve competitive advantage in the marketplace. They never have been. Examples abound of companies that failed to commercialize the inventions produced in their labs, most notably Xerox PARC. In the 1980s, IBM was often cited for the major inventions from our research labs that were first brought to market by competitors, who proceeded to build successful businesses around them -- such as RISC microprocessors, relational data bases and high-speed Internet routers. In that same period, people kept wondering how the US could boast the world's best research universities and laboratories and receive the lion's share of Nobel Prizes, while Japan was reaping the economic benefits of all that US-sponsored research.
But while not sufficient by themselves, inventions, patents and strong R&D support do provide, I believe, a necessary base for marketplace innovation and economic development. For example, there is considerable evidence that, at a national level, investment in R&D pays off. As is well known, the US government's investments in the Internet over the years since the 1960s started to pay economic dividends when the Internet became a commercial success in the 1990s (dotcom bubble notwithstanding), and will continue to do so for many years to come. Recent studies on the subject, such as those from the National Academies and the National Innovation Initiative have strongly recommended that the US Federal government should increase its support of long-term basic research, to insure that there is a strong foundation for innovation well into the future.
As we have learned over the years and as the Money isn't Everything study confirms, basic research is not enough and must be complemented by strong programs to advance education (especially for science and engineering careers) and to create an innovation infrastructure and climate that support commercializing the results of the research. This kind of balance is very much the intent of the National Innovation Act of 2005, legislation recently introduced in the US Senate by Joe Lieberman of Connecticut and John Ensign of Nevada.
But even for individual companies, I can personally attest to the fact that a strong foundation in R&D -- including a deep roster of the technical talent involved in such work -- can not only help a company succeed in times of rapid technological change but, perhaps even more importantly, can enable it to survive.
In the late 1970s, in IBM’s research labs, we started to investigate the future of large systems as part of a new thrust to establish technology transfer programs between our Research Division and our product units. Years later, in the early 1990s, there was a major transition in the technologies and architecture of large systems, as CMOS microprocessors became powerful enough to use in mainframes and supercomputers at a much lower price than the previous bipolar technologies. The transition almost killed IBM's mainframe business and IBM itself. However, as a result of the R&D that had been going on in our labs, our technical community had anticipated this transition and had been designing and prototyping the architectures for future mainframes. While the transition was still very painful, we survived it while many of our competitors have not survived similar technology transitions. Not only do we still have a healthy mainframe business, but we have also emerged as the leaders in supercomputing.
What is clear is that the nature of innovation in the 21st century is changing. Innovation needs to be much more open and collaborative, involving not only all the units in the organization, from sales to marketing to R&D, but the world at large. No company, regardless of its success or wealth, can do the bulk of its own R&D and ignore the powerful forces at work out there in the larger community.
Moreover, as technologies have become increasingly powerful, standardized and affordable, we are able to tackle new kinds of problems found outside the labs, in the "real world," in the marketplace. Thus we are seeing innovation "going up the stack", becoming much more market-facing and multi-disciplinary than in previous times, and increasingly focused on services, which abounds in opportunities for breakthrough ideas given the dominant role of services in the global economy.
The proper management of innovation in our times is one of the most important tasks facing every business. As the Money isn’t Everything study properly concludes, "There is no easy way to achieve sustained innovation success — you can’t spend your way to prosperity. If you’re a corporate leader, it’s time to roll up your sleeves, open the innovation black box, and start retooling the works. The future viability of your enterprise depends on it."