We are often asked to advise company leaders on how much they should invest in technology, science and product innovation. Their assumption is that the more technology and products they invent, the more success they will have with innovation. While spending nothing on R&D is often not an option - technology, science and product innovation are just the first steps towards success.
Having great new technologies and products certainly doesn’t guarantee immediate returns. Research by the consulting firm Simon Kucher & Partners shows that 72% of all new products do not meet their revenue targets. This shows that the difficult part of innovation is creating value propositions that resonate with customers and finding the right business models for profitability.
Research by the PwC firm Strategy&Business, has consistently shown that there is no relationship between R&D spending and returns on investment. The companies that are rated as being the top 10 at innovation outperform the top 10 R&D spenders in terms of revenue growth, gross margin and market cap.
A great example of this Nintendo who developed the Wii using off-the-shelf components. Nintendo found remarkable commercial success with a technologically inferior product, in a market where competitors such as Sony and Microsoft were spending more money on developing cutting edge gaming consoles.
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In fact, companies that are ranked among the top 10 in innovation are just as likely to be low or high in terms of their R&D spending. For example, Amazon spends 13% of its revenues on R&D and is ranked among the top 10 in innovation. Apple spends only 5% of its revenues on R&D, but is also ranked among the top 10 in innovation. In contrast, Nokia spends 21% of its revenues on R&D and is ranked lower than 20th in terms of innovation. This illustrates that there is no direct relationship between R&D spend and innovation. It is what you do with the investment that matters.
The most amazing company in terms of innovation versus R&D spend is Tesla which is not among the top 10 R&D spenders within the automobile industry. The top spenders include Daimler, Honda, BMW, Nissan and Fiat. This shows that, even with better funded competitors, a disruptive insurgent can win market share by creating the right value proposition for customers and finding the right business model. Incumbent companies may be able to spend their vast resources on technology, science and product innovation, while startups are funded and incentivised to find business models that work.
Conclusion
If R&D spending is not the driver of innovation success, then what is? At Strategyzer, we believe that beyond technology and products, companies need to be prepared to support and nurture business model innovation. They need to go beyond products and technology and think about how they create, deliver and capture value from customers. Investments in R&D will only bring returns if the products we invent become successes in the market.
