THE CORPORATE SHIFT FROM R to D AND SHORTERMISM

A new Booz & Company’s annual study of the world’s biggest corporate R&D spenders, reported on Strategy-business.com, finds that most companies have stuck with their innovation programs despite the recession. While many are boosting spending to compete more effectively in the upturn, the report confirms the shift from Research to Development (as noted on this blog in numerous posts), increased risk-aversion and  short-term pragmatism.

The Booz & Company’s report contains a number of important statistics about R&D spending and the trends underlying these. It found that the world’s biggest innovation spenders increased their R&D spending by 5.7 percent in 2008, a slower rate of growth than the prior year’s 10 percent increase, but in line with the group’s 6.5 percent increase in worldwide sales. On a quantitative level this increase in spending looks impressive given that operating income for the group fell 8.6 percent in 2008, and net income plummeted 34 percent.

More than two-thirds of the companies included in this year’s Global Inno­vation 1000 maintained or increased R&D spending in 2008 despite a third of the companies reporting a financial loss for the year. However, the recession has certainly had an impact.

Recessionary Effects

The Global Innovation 1000 have certainly not been immune to the recession. Overall, they spent $532 billion on R&D in 2008, a healthy 5.7 percent increase over 2007, but well below the 10 percent increase from 2006 to 2007. Total sales were up 6.5 percent, to $15 trillion — but again, it was a significantly smaller increase than the 10 percent gain this same group registered between 2006 and 2007. Thus the group’s R&D intensity — innovation spending as a percentage of sales — remained the same at 3.6 percent.

Not all companies maintained or boosted R&D spending. Caution appears to be high: more than a quarter of the Global In­novation 1000 cut their innovation budgets in 2008 while the top 20 innovation spenders increased re­search and development by only 3.2 percent, compared with 10.7 percent for these companies in the previous year. Further­more, the early evidence indicates that as companies entered 2009, spending on innovation slowed further. This has been fueled by steeper declines in sales and income: among the 522 companies reporting results for the first quarter of 2009, R&D spending decreased by 7.4 percent — which is still less than half the rate of their 18.5 percent decline in sales.

Worrying trends:

Despite the quantitative figures reported, the qualitative trends underlying these trends gives grounds for concern. The report draws three trends out which confirm the most worrying longer-term trends. These are and I quote:

  • As a rule, companies are performing less pure and applied research. Instead, they are concentrating their R&D budgets on product development and engineering. This has been a trend for several years — indeed, 44 percent of survey respondents said they spend less than 20 percent of their R&D budget on basic research and advanced development — but it became even more pronounced during the recession. Managers hope to bring new products to market to take advantage of the upcoming recovery. Nearly 40 percent of respondents said their companies are shifting re­sources from basic research in order to prioritize new product launches.
  • The downturn has encouraged many companies — 40 percent, in our survey — to speed up their efforts to make the innovation process more efficient.
  • In response to the downturn, companies have become more risk averse; nearly half of survey respondents say that their companies are now more conservative than before. Companies are changing the criteria they use when giving new products the green light, tightening their relationships with customers and consumers, and watching their competitors, and the marketplace, more carefully.

The report highlights that every top executive interviewed said their companies are working hard to spend smarter — to get more bang for their R&D buck. What this means is an increased focus on improving the returns on innovation investments, in both the short-term and the long:

  • More than 40 percent of survey respondents said their companies were focusing on process improvements to change R&D spend during the downturn, and a similar number reported that they were getting better at killing bad projects;
  • More than a third of companies surveyed, for instance, said they were terminating more exploratory projects that lacked specific time lines; and,
  • More than 40 percent said their companies were focusing more on newer products that have the potential to grow faster.

While searching for efficiencies is to be expected, like it or not, there is a relentless logic at play here which despite the best intentions can only negatively impact on innovation in the future. Short-termism and pragmatism, trends that were in full evidence before the global recession, are now being entrenched into recession-based management practices. This is best expressed by Alan Grant, senior vice president for R&D in developing markets at Kraft Foods Inc. when he argues as follows:

For the past two or three years, we have been looking at our R&D portfolio, focusing on fewer, bigger ideas as opposed to lots of incremental little things. What the recession has done is change the filters through which we view the portfolio. Which of these products might we bring to the front and which might we choose to back pedal on, given the challenging economic times?

While short-term financial speculation got us into this mess in the first place, this report reveals just how far a short-term, risk averse and pragmatic approach is now being entrenched in the innovation practices of the world’s top global companies. At one level this is inevitable. Recessions focus the mind. But this report highlights how the recession is strengthening a risk-averse, short-term pragmatic business culture which, while recognising the importance of innovation, seems to be powerless to take the longer-term measures to guarantee it into the future.

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