2014 Global Innovation 1000: Industrials industry findings

As part of the 2014 Global Innovation 1000 study, Strategy& took a closer look at the industrials industry and how its efforts compare to other industries when it comes to innovation strategies. See how successful the industrials industry has been and what executives are saying about their future plans.

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The 2014 Global Innovation 1000
Industrials industry findings

Maximizing innovation in industrial companies The success of R&D is on every C-suite agenda. For companies operating in the industrial sector, it’s often issue #1. Innovation in areas like machinery and equipment or materials doesn’t just help the bottom line of individual companies – it can actually transform the productivity of entire industries such as agriculture.

About the sector: Our definition of the industrials sector includes makers of machinery and equipment, electronics, primary metals and metal products, and mining companies, as well as engineering, construction, and building materials companies. About the Global Innovation 1000: For the 10th year, Strategy& analyzed R&D investment at the 1,000 biggest-spending public companies in the world. In addition to undertaking our recurring analysis of R&D spending trends, we interviewed and surveyed more than 500 R&D executives and innovation leaders to get their perspectives on changes in innovation at their companies over the last decade and what they expect in the 10 years to come.
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Industrial companies’ R&D spending has generally risen over the past decade
Overall, R&D spending by industrial companies has gone up significantly over the past 10 years. That reflects steady growth with only a few exceptions – 2010 showed a slight drop following the financial crisis, but companies made up for it with strong increases in 2011 and 2012. In 2014 industrial companies continued to show growth in R&D spending, while growth declined in a number of other sectors, including healthcare, consumer, and telecommunications.

Industrial companies’ spending on R&D continued to increase in 2014





post-crisis dip

64 43 44 46 52 51 56













Sources: Bloomberg data; Capital IQ data; Strategy& analysis. Results reflect the previous fiscal year, as of June 30 of the respective year shown. More information about our methodology is available on p. 15 of our strategy+business (Issue 77, Winter 2014) article, “ Proven Paths to Innovation Success.”



Industrial companies rank #4 in innovation investment
Overall, the Global Innovation 1000 invested nearly US$647 billion on R&D in 2014. Of that, more than US$69 billion was spent by industrial companies. That makes the sector one of the biggest spenders on innovation – although still behind the top three. The gap is more noticeable if you look at what we call R&D intensity, the percentage of revenue spent on R&D. In 2014 R&D intensity in the industrial sector was just 2%, compared to 4% for automotive. The software and Internet sector leads the pack, with an R&D intensity of 13% – more than five times higher than industrials.

Percentage of the total R&D spend for all sectors

Computing & electronics




Software and Internet


Aerospace & defense





R&D Intensity: Average % of revenue spent on R&D
11% 7% 4% 2%
Industrials Software and Internet



4% 2%
Aerospace & defense Consumer




Computing & electronics



Sources: Bloomberg data; Capital IQ data, Strategy& analysis.

Want to see more of how industries compare over time and across regions? Check out our interactive comparison of R&D spending by regions and industries
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…but being great at innovation requires more than large R&D budgets
Each year we ask survey participants which companies they believe are the most innovative so that we can create our 10 Most Innovative Companies list. Their responses and our list of Top 10 R&D Spenders match less often than you might expect. Although not one industrial company has made the list of the top spenders over the past five years, two industrial companies – GE and 3M – have been recognized as top innovators every year during the same time period.

Although industrial companies are sometimes perceived as lessthan-nimble, our research indicates that some have made bold innovation efforts that enabled them to pull ahead of their peers.
Barry Jaruzelski, Leader, PwC’s Strategy&’s Automotive & Industrials Practice

2014 Top 10 R&D Spenders









Procter & Gamble Tesla





Johnson & Johnson



2014 10 Most Innovative Companies

US$10b US$5b US$1b

Sources: Bloomberg data; Capital IQ data. Results reflect the previous fiscal year, as of June 30. More information about our methodology is available on p.15 of our Strategy+Business (Issue 77, Winter 2014) article, “ Proven paths to innovation success.”

Want to see who the Top Spenders and Innovators were last year too? Check out our interactive list of the Top 20 R&D Spenders and 10 Most Innovative Companies, 2005-2014
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Moving in the right direction

Regardless of spending trends, most executives think their companies are moving in the right direction when it comes to improving innovation. That’s true for industrial executives too. More than three-quarters say they’ve gotten better at innovation. And nearly half believe they’re outperforming the competition financially as well.

Performing better financially
My company is performing better than the competition in financial terms

Getting better at innovation
My company is better at innovation today than it was 10 years ago, on the basis of the share of specific product or service ideas that have met commercial goals



Two big factors driving these improvements:
getting closer to the customer

better alignment

Note: Analysis is based on survey questions “How much better, if at all, is your company at innovation today than it was 10 years ago, on the basis of the share of specific product or service ideas that have met commercial goals?” (base: 50) and “How do you perceive your company’s current overall financial performance relative to competitors’?” (base: 50) Source: Strategy& 2014 Global Innovation 1000 survey data and analysis



Aligning innovation with business strategy

Our overall research has shown that companies that closely align their innovation and business strategies perform better than those that don’t. More than two-fifths of industrials respondents admit that their innovation and business strategies are not highly aligned, so there is room for improvement on this measure.

Global industrial companies have a unique opportunity to build on the gains that the sector has recently enjoyed. They have built robust cash reserves, but to maintain their growth in the coming years, they must invest it thoughtfully, with the goal of differentiating themselves through digital innovation, more insightful relationships with their customers, and smart expansion strategies.
Marian Mueller, Leader, PwC’s Strategy& U.S. Diversified Manufacturing Practice

My company’s innovation strategy is not highly aligned with its business strategy

My company’s innovation strategy is highly aligned with its business strategy

innovation strategy business strategy

innovation strategy business strategy

Note: Analysis is based on survey question “How closely aligned is your company’s innovation strategy  (or approach to innovation) with its overall business strategy?” Responses of 1, 2, or 3 were defined as  “Not Highly Aligned,” whereas responses of 4 or 5 were defined as “Highly Aligned” (base: 51) Source: Strategy& 2014 Global Innovation 1000 survey data and analysis

Customer needs should guide the innovation focus

Most industrial executives believe they understand customer wants and needs better than they did 10 years ago. But there’s room for improvement; only 20% of respondents from industrial companies say they have a much more detailed understanding of what moves customers, compared to 37% of consumer respondents and 34% of automotive respondents.

Industrial companies operate in a B2B environment; for them, understanding the customer often means coming to terms with an organization, rather than just individuals. That poses different challenges, but it is just as important to fully understand a corporate customer as it is to get to the heart of consumers’ motivations.

Industrial firms need to be more aggressive in adopting new methods for reaching out and understanding new markets or targeting specific customers. When combined with input from end customers and deep research into the sector, these tools can help create a mosaic of insights into previously undefined markets for different products, different customer bases, and new territories.
Marian Mueller, Leader, PwC’s Strategy& U.S. Diversified Manufacturing Practice

My knowledge of customers has become much more detailed

My knowledge of customers has become more detailed

Note: Analysis is based on survey question “How, if at all, has your company’s understanding of your customers’ wants and needs changed over the past 10 years?” (base: 50) Source: Strategy& 2014 Global Innovation 1000 survey data and analysis



How are companies better understanding their customers – and what’s coming next?
Whether you call it the industrial Internet, or Industry 4.0, industrial companies are already beginning to install the next age of automation. By digitally connecting across the value chain, companies can gain better visibility over demand, tailoring production and output to customer needs. Sensor technologies don’t just give companies a better handle on production: They can also deliver valuable information on how products actually get used. By understanding data on areas such as downtime and maintenance, industrial companies can help their customers get more value out of the products they sell – and potentially expand their service portfolio too.

In recent years, innovation has had a major impact on the industrial sector – the proliferation of sensors and impact of software is revolutionizing a range of traditional industrial products.
Barry Jaruzelski, Leader, PwC’s Strategy&’s Automotive & Industrials Practice

Building the factory of the future

Using data to help customers understand themselves better

Keys to success: Outstanding data analysis capability, willingness to invest in the necessary technology and talent, deep cooperation across the entire value chain.

Keys to success: Existing relationships with customers that will agree to data analysis, integration of service offerings with product development.

Sources: PwC, “Industrie 4.0 – Chancen und Herausforderungen der vierten industriellen Revolution”; PwC, “The Internet of Things: What it means for U.S. manufacturing” Strategy& analysis
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How does your company Need innovate? Seekers (43%): Market Readers (18% Need Seeker, Market Reader, or Technology Driver?
Different routes to success Our study classifies companies into one of three innovation models. Although all three strategies can be productive, our research across industries suggests that Need Seekers have an advantage.

Industrial companies are using a range of innovation models

Companies that are Need Seekers tend to engage Comp Marke The dynamic for industrial companies is to consumers directly different from that of many other sectors, generate new ideas, and follow though, because consumers aren’t generally the develop original buyer for theirthen products. So although it makes gener sense that far fewer industrial companies take a monit products and services Need Seeker approach, it’s worth emphasizing custom addressing unarticulated that understanding unarticulated customer needs can be aneeds powerful route to making and get them to focusi innovation more relevant. rst. value market innova produ

Need Seekers Need Seekers (19%)

Technology Drivers ( Market Readers (18%): (43%): Market Readers (41%) Technology Drivers (40%)

Bene de ts of this f Comp Companies that are Need Companies ned asstrategy healthcare companies: Seekers tend to engage Market Readers are fast Techn Understanding how end heavil consumers directly to followers. They typically consumers using techn generate new ideas, and generate ideas by are closely medications and treatme develo then develop original monitoring their markets, can help healthcare Companies defined as Market Companies that are Need Seekers products Companies that are Technology servic and services customers, and competitors, Readers are fast followers. They tend to engage consumers directly Drivers depend heavily on their companies bot breakt addressing unarticulated focusing largely on nd creating typically generate ideas by closely to generate new ideas, and then internal technological expertise to ways monitoring their markets, customers, develop original products and services develop new products and services, improve e innovation ciency and in needs and get them to through incremental addressing unarticulated needs and get and competitors, focusing largely on value driving both breakthrough creating value them to market first. and incremental change to meet develop new service o et meet market rst. through incremental innovations to current innovations to current products. the needs of their customers via for patients. It can also he custom Benefits: By going to consumers, you new technology. products. can better understand how to help your Benefits: If your company has a identify the most techn strong global footprint, you may be customers help their customers. Benefits: This strategy works well promis Drivers (39%): able to Technology generate a lot of momentum by if your company has an excellent therapeutic areas for transferring innovation across regions. engineering function, especially if you Market Readers (18%): pair product development excellence research. with the ability to innovate in business Companies that are models and operational capabilities. Bene Drivers ts of this strategy f Companies de ned as Technology depend healthcare companies: Market Readers are fast heavily on their internal Source: Strategy& 2014 Global Innovation 1000 survey data and analysis Pharmaexpertise companies followers. They typically technological to focus onnew generics and/or generate ideas by closely develop products and Wondering where your company fits in? Check outbiosimilars our online innovation can use this monitoring their markets, services, driving both strategy profiler customers, and competitors, strategyinnovation to increase mark breakthrough share. focusing largely on creating and incremental change10to Strategy& value through incremental meet the needs of their innovations to current customers via new

Innovation can be managed Innovation, although different from operations, sales, and marketing, is nevertheless a function that can be managed: There are principles that are known, capabilities that can be built, and recognized levers that can be pulled to improve the process over time. The stakes for making these efforts are high—the disparities in innovation performance show that there are tremendous opportunities for getting more from your R&D spending, and for improving your competitive position and your financial performance. To learn more: strategyand.pwc.com/innovation1000




Author: Barry Jaruzelski Barry Jaruzelski is a Principal in the firm’s Florham Park, N.J., office and the U.S. Leader of Strategy&’s Automotive & Industrials Practice. He created the Global Innovation 1000 study in 2005, and continues to lead the research. He works with high-tech and industrial clients on corporate and product strategy and the transformation of core innovation processes. [email protected] Barry Misthal PwC Global Industrial Manufacturing Leader [email protected]

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