11/13/14
Big companies say their innovation spending will change significantly over next decade, according to findings of Strategy&’s 2014 Global Innovation 1000 study

Large multi-national companies report that they expect the focus of their innovation efforts and investments to change significantly over the next decade – moving toward a far greater emphasis on riskier initiatives and breakthrough innovations, according to the newly released, tenth annual 2014 Global Innovation 1000 Study from Strategy&, part of the PwC network

New York, November 13, 2014 – Large multi-national companies report that they expect the focus of their innovation efforts and investments to change significantly over the next decade – moving toward a far greater emphasis on riskier initiatives and breakthrough innovations, according to the newly released, tenth annual 2014 Global Innovation 1000 Study from Strategy&, part of the PwC network. The study includes a survey of over 500 innovation leaders at nearly 500 companies.

Innovation leaders say that today most (58%) of R&D spending at their companies focuses on incremental or renewal innovations, i.e., those relating to current products, and just 28% on new or substantial innovations and only 14% on breakthrough or radical innovations. Those same leaders say that in 10 years the share of innovation spending directed to new innovations will increase by a quarter, climbing to 35% and the portion for breakthrough innovations will jump by nearly a half to 22%. The amount focused on incremental innovations will drop by a quarter to 43%.

“Riskier, breakthrough innovations were de-prioritized in the midst of the financial crisis. With the healthier market conditions, it is not surprising that business leaders say they plan to focus more on big breakthroughs. This will require companies to build new capabilities, an effort which they must not underestimate. It’s not by planning or shifting spending alone that they will achieve this.” says Barry Jaruzelski, a senior partner at Strategy&, formerly Booz & Company, and one of the study’s co-authors. (Click here for an overview of the study’s findings.).

More R&D spending on services in the future, less on products
Companies indicate they intend to direct more spending to services R&D, at the expense of product R&D. Today most innovation spending (52%) goes to products. In 10 years, R&D for services will take up 62% of innovation spending, innovation leaders say.

“A great example is Visteon, traditionally an auto parts company. It is now exploring services related to internet-connected cars. For instance, it’s working toward wireless charging and wireless communication enabling cars to communicate with one another,” says Barry Jaruzelski.

Companies know they need to align business and innovation strategies
Many companies say they see aligning business and innovation strategy (20%) and building select innovation capabilities (18%) as the most important priorities for innovation success over the next decade. In addition, many companies also plan to focus on aligning company culture (14%) with innovation strategies. Others (13%) plan to build external innovation networks.

Overall, nearly half of companies admit that they have not already focused on an innovation area they think will be most important for future innovation.

“The great disparities in innovation performance underscore that there are still tremendous opportunities for companies to get more from their R&D spending, and to enhance their competitive positions as well as financial performance,” says Barry Jaruzelski.

Other 2014 Global Innovation 1000 findings

  • Total R&D spending by Global Innovation 1000 companies grew by only 1.4% between 2013 and 2014, a slowdown compared to the 2012-2013 growth rate of 3.8% and a notable drop from the nine-year CAGR of 5.6%. Meanwhile, R&D intensity – R&D spending as a percentage of revenue – decreased by 17% between 2005 and 2014. “Lower R&D intensity may indicate that companies have realized more spending doesn’t always produce better results and that innovation leaders are becoming more proficient at leveraging their R&D investment for greater returns,” said Barry Jaruzelski.
  • The computing and electronics and healthcare industries together constituted 47% of all R&D spending in 2014, although both industries reduced their spending for the first time since 2010 – by 1.8% and 1.2%, respectively. Meanwhile, the software and Internet industry increased its R&D spending by 16.5% in 2014 – the largest increase of any industry sector this year.
  • Chinese companies increased R&D spending by 45.9% in 2014, compared with increases of only 3.4% in North America and 2.5% in Europe and a decrease of 14% in Japan. Over the past decade, the number of China-based companies in the Global Innovation 1000 jumped from just 8 to 114 – a growth of 1,325%.
  • When it comes to innovation success, you can’t buy your way to the top. Of the Top 10 R&D Spenders, only three – Google, Samsung and Microsoft – were in the 10 Most Innovative Companies in 2014. In fact, over the last five years, only one company has ever been in both top 10 lists every year: Microsoft.

Methodology
Strategy& identified the 1,000 public companies around the world that spent the most on R&D, as of June 30, 2014. The Global Innovation 1000 companies collectively account for about 40% of the entire world’s R&D spending, while the next 1,000 largest corporate spenders only represent an additional 3%. For each of the top 1,000 companies, Strategy& obtained from Bloomberg and Capital IQ key financial metrics, including sales, gross profit, operating profit, net profit, historical R&D expenditures and market capitalization. To understand how innovation has changed at companies over the past 10 years and what to expect for the next decade, Strategy& conducted a separate online survey of 505 innovation leaders at 467 companies around the world. The companies participating in the survey represented just under US$130 billion in R&D spending, or 20% of this year’s total Global Innovation 1000 R&D spending, all nine of the industry sectors and all five geographic regions.


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