Does percent of revenue firms spend on R&D really matter? Research shows that is not necessarily the case. It depends on the nature of the industry, and a host of other factors that are not necessarily or can be directly attributed to R&D.
‘Innovation is crucial to high performance in the FMCG industry. But a company’s ability to innovate is about much more than R&D’ said Bart Becht, the former CEO of Reckitt. ‘We measure innovation by the percentage of net revenue coming from new products launched in the past three years. That’s a measure of output, not input. There is no correlation between the percentage of net revenue spent on R&D and the innovative capabilities of an organization—none. That’s not to say that R&D capacity isn’t important, but at the end of the day, innovation is generated by new ideas’.
It’s more about how ideas are evaluated, and the processes between idea generation and validating a winning concept.
Our biggest challenges is to make sure that you have a continuous stream of new ideas and innovations to bring to market. Reckitt’s innovation rate (defined as the percentage of annual revenues from innovations launched in a 3 year period) had improved from about 20% to over 30% on average, reaching 40% in 2008. However, the focus on innovation did not mean huge R&D spending. In fact, Reckitt’s overall R&D spending was relatively low by industry standards, amounting to 1.8% of net revenues, compared to around 2.5% at Henkel and Procter & Gamble and 2% at Unilever.
The company’s success in picking winning products hinges on its knack for developing consumer insights. Reckitt conceived a strategy—dubbed “innovation marketing” – that has produced consistently impressive earnings growth. Innovation marketing, as its name suggests, is a combination of product innovation and increased outlays for marketing (at 12.5 percent of sales, Reckitt’s media budget is probably the highest in the industry). However, a key part of its success – the business nurtures a unique culture (more about this in another blog).
Increasing R&D spending will not necessarily lead to Innovation. However, by focusing on other tactics and actions can and will lead to better innovation.
In another analysis of high performance innovators, researchers made an interesting observation: “spending more money does not open the doors to innovation.”
For a lot of enterprise-level organizations, the general belief is that spending more money on research and concept development will lead to more new innovations and better results (like top line revenue growth or cost savings). Instead the researchers found that there were a few key company values that led innovators to have positive results:
- embed innovation in the business strategy,
- focus on innovation culture
- involve leadership in innovation
- leverage customer insights
- hone the idea selection process
- providing impetus to creating disruptive change.
The actions and tactics that support those six qualities serve as the six key job functions of an innovation department:
- Innovators should be scanning the horizon for information and signals from competitors, customer insights, market signals and other trends. Those findings will inform ideation campaigns, business strategy, leadership decisions, and more.
- Share Best Practices. Innovators must discover what’s working in another part of the organisation and force multiply its success by applying it elsewhere. Rinse. Repeat.
- Idea Collection. Visibly assigning a place for ideas to mingle and for people to collaborate is a great way to support innovation culture, but it also serves the triple purpose of creating a mine for new and promising ideas, an incubator for selected ideas, and a parking lot for ideas that the world isn’t yet ready for. That’s how you find both incremental and disruptive change.
- Idea Connection. This means connecting ideas to people, decision makers, resources, and other ideas. Doing it visibly further elevates the innovation culture and having a truly great idea selection process makes those connections manageable and impactful.
- Invest in your people by training them in innovation best practices: how to brainstorm, how to recognise great ideas, how to grow and test good ideas, and more. That professional development will go a long way towards improving your overall workplace culture while also building innovation capacity.
- Communication. Perhaps the most important tool for building an innovation culture is communicating inside and outside of a company where you’re going, what’s working, what you’ve learned, and recognising who got you there.
Ultimately, it’s important to have a clear view of the significant role R&D can play in the driving and delivering innovation in your organization. The last thing to vaguely consider is cutting the R&D budget due to poor business performance, or during an economic downturn.
