R&D budgets holding up but better strategy alignment needed

By November 10, 2014

Developments over the last ten years in company R&D and Innovation-oriented investment have not always been well aligned with corporate business strategy.

Company expenditure on Research and Development reached an all-time high this year. The 1,000 innovative firms studied for a recent report – ‘The 2014 Global Innovation 1000: Proven paths to innovation success’  – by Strategy&, the global management consulting arm of consultancy firm PricewaterhouseCoopers, registered $647 billion worth of investment in R&D this year, up from the $400 billion invested in 2005. This spectacular increase over a ten-year period prompted the PWC analysts to look in detail at how things have changed over the last decade in companies’ approach to R&D spending and find out where most of the investment is now going.  The conclusions point up a number of trends. China ″vastly outpaces all other regions in spending growth″, says the report, with 45.9% growth over the last decade, compared with just 3.4% for North America. In addition to the geographical breakdown in R&D spending, the report underlines significant changes in the business/technical areas where investment in innovation is taking place. The authors conclude however that there is often insufficient alignment between firms’ innovation strategy and general business strategy.

Strong focus on incremental innovation

It comes as no surprise that R&D spending in the Software and Internet industry has been booming, rising by 16.5% in 2014 year-on-year, the biggest increase of any sector. On the other hand, two sectors have seen rather surprising decreases in spending: in the Computing and Electronics industry, research and development spending fell this year by 1.8%, while the Telecoms sector trimmed 7.5% off its research expenditure.  In gross terms, R&D investment is strongest in those sectors – such as the Automotive industry and the Energy sector – where consumers nowadays expect to see constant progress, or at least novelty, and innovation is therefore a must in order to remain competitive. However in the Healthcare sector, where development expenditure is consistently very high but the tangible results of research work are very uncertain, R&D investment has fallen this year.  The Innovation Leader companies responding to the Strategy& analysts are spending an average of 58% of their R&D budget on ‘incremental’ innovations relating to current production, channelling just 28% into ‘new’ innovations and devoting only 14% to achieving ‘breakthrough’ innovations.  There are moreover some apparent paradoxes in the survey results, such as why investment in Computing and Electronics should have fallen at this moment in time.

No correlation between R&D spending and business performance

In fact the Strategy&/PWC report reveals that increases in R&D spending do not necessarily lead to greater product success or larger company turnover. If this appears rather paradoxical, Barry Jaruzelski, Senior Partner at Strategy& who is one of the authors of the report, draws a clear conclusion: “You can’t just buy your way to the top,” he points out.  Microsoft for example spends over twice as much on R&D as Apple, but its turnover is lower. Meanwhile, though firms continue to invest more, it is nevertheless vital to draw up a clear strategy. Companies are confident that their approach to R&D has improved, with over three quarters of the company heads polled stating their belief that  their companies are better at innovating than they were a decade ago . On the other hand, according to survey respondents, ″the most important factor for success will be aligning business and innovation strategies over the next decade″.


Legal mentions © L’Atelier BNP Paribas