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Friday, March 17, 2006
R&D Expenditure & Innovation : Bang For The Buck
Apple is rated as the most innovative company by Fortune. Thestreet.com finds that "Apple’s recent financial - and stock - success has resulted from merely holding the line on one of the sources of that innovation: its spending on research and development.Even while Apple's revenue has skyrocketed in recent years - and even as expectations for future products and success have exploded - what the company has spent on R&D has risen only modestly. As a portion of overall sales, such expenses have actually fallen by more than half".Analysis shows that the sales have grown at a compounded annual rate of 27% over the last four years,, while R&D spending has grown at an average rate of just 5.6% per year over that period. While the analysis is rght in highlighting that Apple is too dependant on a few revenue streams, I do not necessarily agree that increasing R&D expense may be the best way to insure its future. As Michael Scrage recently wrote brilliantly,the simple fact is that "R&D spending is an input, not a measure of efficiency, effectiveness or productivity.Ingenuity, invention and innovation are rarely functions of budgetary investment & points to the fact that Wal-Mart, Texco and Dell have miniscule R&D budgets, their quality, procurement and growth requirements have probably done more to drive productive innovation investment than any competing initiatives. Growing market competition, not growing R&D spending, is what drives innovation". A successful innovation policy is a competition policy where companies see innovation as a cost-effective investment to differentiate themselves profitably. It is not proper to confuse the number of patents as an index of innovative abilities. In general, process innovation is far more powerful than product innovation – it has a multiplier effect that product innovation can rarely match - the best way to look at innovation activity is the rates of productivity improvement in value add inside enterprises measured against the number of employees. Plain financial metrics may be of little use in assessing productivity increase – the ability to bring multiplier effects through productivity initiatives may be the one to watch for. Look at the spend levels of IBM, HP, Microsoft, Sony – list the number of innovative products that have come out of their labs in the last 24 months – quite concerning would be the answer. In contrast look at the R&D expenditure of the like of Apple, Google, RIM and list the innovative products that have rolled out of these enterprises – the answer is straightforward. There is no link between R &D, productivity improvements or innovation. One does not need to spend about five billion in R&D to find that the next big thing does not exist. Its clearly organizational interest, result orientation, quality of leadership and the latitude the research team has and the integration that business and research has within the enterprise that matters a lot. Clearly these are the factors that get severely affected when organization grows. It’s time to look at assessment of new product /new revenue streams coming out of enterprises lot more closely as they begin to grow.
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