Corporate R&D Spending Rebounds in 2010, Finds Booz & Company Global Innovation 1000 Study
Companies with corporate cultures that support innovation strategies have superior financial performance, survey data reveal. For first time, Facebook named to top 10 of world’s most innovative companies.
Total R&D investment among the world’s top spenders on innovation surged upward in 2010 from its recession-induced decline in 2009, according to the 2011 Global Innovation 1000, the seventh annual study of corporate innovation spending, released today by global management consulting firm Booz & Company. The study revealed that the 1,000 public companies that spent the most on research and development in 2010 increased total R&D outlay by 9.3 percent to $550 billion, rebounding from 2009’s 3.5 percent decline—marking a return to the long-term growth trajectory for innovation spending.
2010’s increase in R&D did not keep pace with the 15 percent spike in revenue among Global Innovation 1000 companies, resulting in a slight decline in R&D intensity, or R&D spending as a percentage of revenue—from 3.76 percent in 2009 to 3.52 percent in 2010. However, this was a natural balancing out of the long term trend given that in 2009 most companies did not cut innovation dollars nearly as deeply as their double digit decline in sales might have indicated.
“Clearly, 2010’s R&D increases confirm a continued commitment to invest in new and improved products and services in ever-more competitive markets around the world. However, much of the R&D growth represents catch-up rather than higher levels of new investment,” said Chadi Moujaes, Partner at Booz & Company.
Booz & Company analyzed the 1,000 public companies that spent the most on research and development in 2010 in what continues to be the most comprehensive effort to assess the link between innovation and corporate performance. The study uncovers insights into how organizations can get the best return on their innovation investment. New to this year’s study is an in-depth examination of the role of corporate culture on innovation effectiveness and financial performance, based on a separate survey of nearly 600 innovation leaders in companies around the world.
Saudi Arabia’s Saudi Basic Industries Corp. (SABIC) is the only company in the Innovations 1000 list from the Middle East. SABIC holds slot number 471 in the 1000 list and is one of the world's top spenders in innovation, outperforming many of its competitors. Moreover, this year’s rank is an improvement over last year’s 501 position. Total R&D spend by SABIC in 2010 increased by 23% going from $141 million in 2009 to $174 million in 2010. Other chemical companies maintained their R&D spend during the course of the year. However, SABIC’s R&D constituted 0.43% of the company’s sales in 2010, a drop from 0.51% the previous year.
Among the 2010 Global Innovation 1000 study’s key findings:
Fully 68 percent of all companies Booz & Company tracked raised R&D spending in 2010, and three industries accounted for more than three-quarters (77%), or $36.1 billion, of the total $46.8 billion increase: Computing and electronics, health and automotive. Industries experiencing the greatest percentage increase in R&D spending were software and internet (11%), health (9.1%) and industrials (8.5%).
- The computing and electronics sector realized the biggest absolute increase in R&D spending and remained the number one industry for innovation expenditures, accounting for 28 percent of the total. With revenues up 14.2 percent, the computing and electronics sector increased innovation outlays by 6.1 percent, or $16.9 billion. However, for the first time since the inception of the Global Innovation 1000 study, no high-technology company was among the top three R&D spenders.
- Health was second among industry sectors in share of total R&D expenditures at 22 percent. The industry increased outlays by 9.1 percent, or $10.4 billion, the highest rate of increase among the top three industries in 2010 and in line with the overall R&D increase (9.3%) across all sectors. The health sector, whose R&D expenditures are chiefly by pharmaceutical firms, captured four of the top five spots in spending among the Global Innovation 1000 and eight out of the top 20 firms in total R&D spending.
- Automotive retained third place with a 15 percent share of total spending, due to a spending boost of 8 percent, or $8.8 billion, in 2010, a significant change after cutting R&D outlays by 14 percent in 2009. Revenues for the auto sector were up 16.5 percent over last year.
Globally, every region increased innovation spending in 2010, a significant turnaround compared to the previous year when the three regions making up the lion’s share—North America, Europe and Japan—all cut back. India- and China-based firms again increased their total R&D outlays at a far higher rate than those in the three largest regions:
The turnaround was cautious in Europe and Japan headquartered companies that saw 5.8 percent and 1.76 percent increases in R&D spending, respectively. North American headquartered companies, after cutting R&D by nearly 4 percent in 2009, increased R&D spending by 10.5 percent in 2010—beating the overall global growth rate of 9.3%.
China and India—and to a lesser extent countries outside of North America, Europe, Japan and Asia—continued to boom, albeit from a small base. Accounting for 2 percent of global R&D outlays in 2010, Chinese and Indian headquartered companies upped R&D investment by more than 38 percent, almost identical to the previous year’s growth pace. Companies from other regions around the world boosted R&D almost 14 percent.
The top 20 global spenders averaged 10 percent R&D growth, representing $142 billion in R&D on sales of $1.6 trillion. This exceeded the 9.3 percent increase for all Global Innovation 1000 companies. Roche Holding AG led the global pack for the second year in a row, with an R&D outlay of $9.6 billion of its $45.7 billion in revenues on innovation—an R&D intensity rate of more than 21 percent. Toyota Motor, the top R&D spender for several years prior to the recession, fell from fourth to sixth place with a spending increase of under 1 percent.
- Pfizer (#2), Novartis (#3), Microsoft (#4) and Merck (#5) rounded out the top five spenders. Ford was the only company exiting the top 20, and AstraZeneca the sole newcomer moving into 18th place.
When it comes to innovation, spending doesn’t correlate with success. As part of its web-based survey of nearly 600 innovation executives from over 400 leading companies in every major industry sector, Booz & Company asked innovation leaders to name the companies they considered to be the most innovative in the world. For the second year in a row, Apple led the top 10, followed by Google and 3M. This year, Facebook was named one of the world’s most innovative companies, entering the list at number 10. In a comparison of the firms voted the 10 most innovative versus the top 10 global R&D spenders, Booz & Company found that the most innovative firms outperformed the top 10 R&D spenders across three key financial metrics over a 5-year period—revenue growth, EBITDA as a percentage of revenue and market cap growth—consistent with last year’s findings. Just three of this year’s top 10 spenders also ranked among the top 10 innovators: Microsoft, Samsung and Toyota Motor.
Corporate Culture Has Measurable Impact on Innovation Success
For the first time, this year’s Global Innovation 1000 provided a deeper look into the impact on the intangible factor of corporate culture on companies’ ability to innovate successfully through the survey of innovation leaders.
The key finding: culture is key to innovation success, and its impact on performance is measurable. Specifically, the 44 percent of companies who reported that their innovation strategies are clearly aligned with their business goals—and that their cultures strongly support those innovation goals—delivered 33 percent higher enterprise value growth and 17 percent higher profit growth on five-year measures than those lacking such tight alignment.
In analyzing the three distinct innovation strategies identified by Booz & Company for creating and taking products to market—Need Seekers, Market Readers and Technology Drivers—the study demonstrated that one strategy stood out—Need Seekers—for facilitating the strongest alignment of innovation and business strategies with culture, and achieving superior financial performance over time:
- Need Seekers consistently strive to be first movers and proactively engage customers to shape new innovations, and are three times more likely than the average company to report strong alignment of culture with innovation and business strategies. Executive vice president of research and development and CTO Fred Palensky of 3M, a Need Seeker, affirmed, “Our goal is to get the voice of the customer all the way back to the basic research level and the product development level, to make sure our technical people actually see how their technologies work in various market conditions.”
- Among Need Seekers, 70 percent say their culture strongly supports innovation strategy, as compared to 27 percent of Market Readers, who adopt a second mover strategy and emphasize incremental change, and 37 percent of Technology Drivers, who stress technology achievement and both incremental and breakthrough change.
- This year, the study also profiled Silicon Valley-headquartered companies, and determined that they are almost twice as likely to follow a Need Seeker innovation model, compared to the general population of companies in our global survey. They are almost three times as likely to say their innovation strategies are tightly aligned with their overall corporate business strategies—54 percent, compared with just 14 percent among all companies. When asked if their corporate cultures supported their strategies, 46 percent of Silicon Valley companies strongly agreed, compared with only 19 percent of all companies, more than double the general population.
“You can succeed with any of the 3 strategies. For example, Google is a Tech Driver and Samsung is a Market Reader and both are winning in their markets. If you align your innovation strategy and culture to your business model, build the right capabilities, and execute, you can prevail no matter which strategy you follow,” according to Moujaes.
Booz & Company 2010 Global Innovation 1000: Methodology
Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2010 (companies for which public data on R&D spending was available). This is the same approached used in the previous six years of the study.
Booz & Company analyzed key financial metrics for each of the top 1,000 companies from 2002 through 2010—including sales, gross profit, operating profit, net profit, R&D expenditure, and market capitalization. All foreign currency sales and R&D expenditure figures through 2010 were translated into U.S. dollars at 2010 daily average exchange rates. In addition, total shareholder return was gathered and adjusted for each company’s corresponding local market.
Each company was coded into one of nine (9) industry sectors (or “other”) and into one of five regional designations as determined by each company’s reported headquarters location. To enable meaningful comparisons across industries, Booz & Company indexed the R&D spending levels and financial performance metrics for each company against the industry group’s median values.
Booz & Company conducted a separate online survey of nearly 600 innovation leaders in companies around the world in order to explore the role of corporate culture as it relates to successful innovation and financial performance. Survey respondents were also asked a series of questions to help classify their companies into one of our three innovation strategy models: “Need Seeker,” “Market Reader” or “Technology Driver.” The characterization of each company into one of these three models is based objectively on their answers to our four profiling questions.